The Wall Street Journal reports the last 30-day period has been the least volatile for the stock market in the last two decades. Only 5 days in the last 30 saw the market move in either direction by greater than 0.5%, the lowest since the fall of 1995.
A couple of reasons for this calm is that a number of large firms abandoned their aggressive positions after the BREXIT vote and have yet to make any large bets this summer. Another is the summer is a slow time while investors are vacationing, so there’s less trading going on, and lastly, central banks (including ours) are helping stabilize the global economy by keeping rates as low as possible.
Whatever the reason, calm has descended on the stock market and we view this as a great time to review our options for the inevitable downturn. Let’s review what we could do to protect ourselves:
Buy insurance – Just like you buy car insurance for the eventual wreck, we could also buy portfolio insurance (SPY puts, to be technical) for the stock market wreck. We performed an analysis recently with some experts at TD Ameritrade to consider buying this insurance, but came to the conclusion this would create more complexity than value for our clients.
Move all to cash – This is a tempting strategy after the run-up we’ve had this year, and to be honest, we’ve wanted to do this multiple times in the past few years. However, we’re terrible at predicting the future and would’ve cost our clients significantly by trying to predict the next subprime crisis.
Wait – This is not a great strategy for all portfolios, but it’s especially good for most our clients that rely so heavily on income from dividends and interest. Because we need to own the stocks and bonds to be paid the income, we’re happy to stay invested and be paid to wait for the next barrage of financial drama.
Just as long as we stick to our story of: 1) avoiding companies that look to reduce their dividends (even if that means we hold more cash than usual), and 2) buy companies at good prices that are growing their dividends, our portfolios should perform well over the long-term.
In other news, we had a new addition to the family! Penelope “Penny” Porter was born on July 16, 2016, weighing in at 7lb 10oz and 19.5” long. Penny came quickly (thankfully) and is perfectly healthy. Her mom and her are still trying to negotiate an agreeable sleep schedule.
Thanks for taking the time to read. Please call or email with any questions.
-Tim Porter, CFP®