Both the bond market and stock market (core asset classes) were down in September. This means diversified portfolios were also down for the month.
This happens from time to time, however, I sensed a lot of shock from commentators, clients and the general public. So, I figured this was a good opportunity for a refresher on how markets behave and realistic expectations for returns and volatility over time.
Even though I emphasize so much of this in clients’ financial projections and Financial Plan summaries it’s good to have occasional refreshers as it’s easy to forget about the true nature of markets especially after long periods of relative calm and positive returns.
September Market Performance Summary
The U.S. Bond market (Symbol: AGG) lost about 2.6% in September while the global stock market (Symbol: ACWI) was down about 1.2% for the month.
Therefore, diversified portfolios were likely down around 1.4% to 2.2% for the month, depending on the targeted allocation between bonds and stocks.
That seems like a big loss, but it’s minor relative to the worst months throughout history. It’s fairly routine volatility for a diversified portfolio.
Historical Context
Below is a chart showing the average returns along with worst and best returns for calendar week, month and year since December 31, 1987.
The chart includes that data for the US bond market, the global stock market and blended portfolios across the risk spectrum from very conservative 80% bonds / 20% stocks up to very aggressive 20% bonds / 80% stocks.
We see that the worst month for the bond market was down about 4.3% (September 2022) while the worst month for the stock market was down about 20% (October 2008), during the Great Financial Crisis!
Generally, the greater your stock exposure the higher your volatility and the bigger the downside your portfolio experienced. Bonds are there to cushion that volatility and temper the downside over time, but it doesn’t mean it works out like that in every period. There will always be exceptions.
The point of all this is to show that volatility and losses are to be expected increasing the likelihood we remain calm and steady when it happens, which, in turn, increases the likelihood we’ll successfully navigate market cycles.
Periodic volatility and losses are the norm, not the exception. In order to be an investor and experience growth on your assets we have to be willing to tolerate some degree of volatility and downside. There will be weeks, months and even years when portfolios are down. If there was no risk or volatility there would be no return to be had.
Part of my job is to determine each clients’ financial capacity for risk through a robust analysis that incorporates their unique circumstances and then build a portfolio around that to maximize each clients’ probability of achieving their financial goals through various market environments.
The key to long-term successful investing (and anything in life really) is remaining committed, disciplined and steady in both good and bad times. The reason retail investors tend to fare so poorly over full market cycles is because they let emotions drive them in and out of assets at the wrong times…typically chasing “hot” assets near tops or selling good assets near cyclical bottoms when fear takes over.
Taking a long-term view and holding realistic expectations of return and volatility can help us remain committed, disciplined and steady.
Disclosures:
Past performance is no guarantee of future results. All investments maintain risk of loss in addition to gain.
Data from third-parties is believed to be reliable but accuracy is not guaranteed. Much of the data used to interpret the markets and forecast returns are often at odds with each other and can result in different conclusions.S ome data may be outdated.
This is not investment advice but merely a general commentary. Individualized investment advice cannot be provided until a thorough review of your unique circumstances and financial goals is completed.
Views provided here are current only as of the moment of posting and are subject to change at any time without notification.
Indexes are not investable directly and do not include expenses or taxes.
