2017 was a boring year for the financial markets. It seemed like every day last year the S&P 500 and NASDAQ creeped higher and higher. In fact, 2017 was one of the calmest year for the markets in decades.
2018 has started off a different story. After blasting off in January with the S&P 500 rising almost 6 percent, February and March have been met with large swings up and down, ending down 0.8 percent on a total return basis at the end of March. With this recent volatility, now is a good time to understand what is going on and how you might be affected.
Factors affecting the market
As we write this article (early April) there are several headwinds that the markets are facing. The Federal Reserve has a new chairman, Jerome Powell, and there is uncertainty about if the Fed will increase its pace of rate hikes for the remainder of the year in order to tamp down potential rising inflation. There have been escalating tensions in regards to trade with the President announcing proposed tariffs against Chinese imports with China swiftly responding with their own proposed tariffs on U.S. imports. Whether or not this leads to a trade war or renewed negotiations remains to be seen, but if there is one thing that markets hate, it is uncertainty. Lastly, while the technology sector got off to a strong start for the first part of the quarter, concerns over consumer’s right to privacy and possible regulatory concerns began weighing down the sector in March.
What you can do
If you haven’t reviewed your portfolio in a while, now would be a good time to look at your underlying investments and ensure that they are still aligned with your overall goals, time horizon, and risk tolerance. Last year it was easy to become complacent, but now it’s time to really understand what’s in your portfolio and why you have it. We believe in proper diversification and not putting “all your eggs in one basket.” If after a review of your portfolio, you find that you are too heavily invested in one asset class for your individual goals, consider reallocating. It’s important to work with a financial professional who can help review your overall portfolio and identify areas that may need an adjustment. A financial professional can also help explain potential tax implications of making changes within your portfolio depending on the types of account you own.
If you have both short and long term goals, consider the buckets approach for your investments. Short term goals, like savings for a down payment on a home or building up an emergency fund should be conservatively invested. Longer term goals like retirement (depending on your age) can allow you to take the perspective of a longer term time horizon, which may allow you to ride out the short term ups and downs we are currently seeing in the markets.
Although it is never comfortable when the financial markets retreat, it is important to at least try to keep things in perspective. Market pullbacks happen on a regular basis. Although not new, this kind of volatility and market drop just has not happened recently. The market has been up so long that it is easy to forget the reality of the occasional downturns. In fact, before this current downturn the S&P 500 stock index had not fallen 5 percent from its peak since 2016 (June). As we wrote in one of our previous articles: “It is human nature to get excited about the good news, just as it is easy to overreact to bad news.” We encourage individuals to keep a clear focus on their objectives and not to overreact.
Gary E. Croxall, CFP®
Registered Principal of LPL
Soren E. Croxall, CFP®
Registered Representative of LPL
Securities and Advisory Services offered through LPL Financial, member FINRA/SIPC, a Registered Investment Advisor. LPL Financial and Croxall Capital Planning do not provide tax or legal advice. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Indices are unmanaged measures of market conditions. It is not possible to invest directly into an index. Past performance is not a guarantee of future results. Examples used as illustration only. Investment decisions should be based on individual’s goals, time horizon, and tolerance for risk.
