Long-term view, anti-inflation forces allay market volatility

Investment allocations must be matched to long-term objectives and goals, and to one’s individual time horizon.

It’s a strategy that serves as a good antidote to market fluctuations and volatility.

Many individual investors find it tempting in the short term to try to time the lows and highs in the markets.

But timing market lows and highs is very difficult and can have costly results.

An individual investor, for example, might have chosen to get out of the market in early February when we had a correction. If so, the investor would have missed the partial recovery that has occurred since then, illustrating the benefits of a longer view.

The average individual investor has returns that are lower than the markets and significantly lower than those of investors who use a financial adviser.

According to a study by Vanguard, the potential added value of an adviser in basis points of return is about 300, or 3 percent. Financial advisers provide behavioral coaching to clients or are given discretionary trading authority over their accounts, mitigating individual investor impulsivity and minimizing market timing mistakes.

THE LONG TERM

It is important for investors to remember there have been very few 10-year time frames where stocks have had negative returns.

Even if an investor puts money into stocks at the top of a cycle, generally he will do just fine over the long term.

In fact, a study by J.P. Morgan shows the volatility of returns decreases significantly over the passage of time, with ranges in total returns varying as much as 85 percentage points after one year but only 10 points after 20 years.

And when portfolios are diversified, these ranges diminish significantly: The range of returns in diversified portfolios varies by 50 percentage points after one year but only by five points after 20 years.

CHANCE TO SHED

In recent months, investors have grown concerned about market volatility.

It is doubtful that recent market corrections are the beginning of a bear market or that a recession is around the corner.

In fact, corrections can be healthy for the market and provide opportunities to make investments at more reasonable valuations.

While looking at new investment opportunities, it is prudent to be flexible and consider pruning positions that have appreciated substantially the past two years and that still may be trading at lofty levels.

DEMOGRAPHIC IMPACT

While today’s tight labor market has the potential to be bad for the economy since it could lead to higher inflation and interest rates, a major downturn because of rising interest rates is not a given since there are powerful secular disinflationary forces at play today and arguably into the future.

These forces that would counter the effect of higher interest rates are demographics, information technology and the globalization of supply chains.

With demographics, our population is aging and baby boomers are retiring. As these people leave the labor force, they make less money, their purchasing power decreases and, as this group gets larger, inflation slows.

REIN ON PRICES

Another factor keeping inflation down is the impact of information technology on prices.

Just think about how the “Amazon effect” keeps prices low.

Retail consumers can simply pull out their phones to immediately determine if Amazon or another vendor offers an item at lower cost, which contributes to pricing competition and market disruption.

And finally, the globalization of supply chains keeps inflation in check by reducing costs for manufacturers.

BATTLE OF ECONOMIC FORCES

Even with a tight labor market, these secular disinflationary forces are strong protection against market fluctuations.

The question is whether these factors will overpower the impact of a tight labor market pushing up inflation. Only time will tell.

One thing, though, is for sure – having a long-term strategy in place with a trusted financial adviser is the best defense against market volatility and potential economic downturns.

Investors are well-advised to be patient and avoid focusing on the day-to-day noise in the markets.

Michael Joyce, founder and president of JoycePayne Partners of Bethlehem and Richmond, Va., is responsible for overall investment strategy, management of investment portfolios and financial counseling services. He can be reached at mjoyce@joycepaynepartners.com.

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