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Q1 Perspective – Surviving Roller Coasters

April 29, 2016   |   News

Last weekend was opening weekend for central Pennsylvania’s three big local amusement parks.   (Hershey Park, Dutch Wonderland and Knoebels) This means that crowds of people will be once again be flocking to these parks to enjoy some of the country’s best and most historic roller coasters.   The three parks offer a total of more than 18 different roller coasters for all ages and levels of thrill seekers.   

These amusement parks are not the only place that people experience the thrills (and fears) associated with roller coasters rides.  This past quarter in the stock market reminded us how “roller coaster-like” markets can be.  The S&P had its worst start to a year ever, dropping 11.9% by mid-February.  Falling oil prices, the Fed signaling rate hikes, and a slowdown in China all were contributors to this drop.  It then recovered 12.5% by April 1st, with oil prices rebounding, the Federal Reserve slowing down rate hikes, and unemployment continuing to drop.  What a ride!  The media and investment “experts”, usually Wall Street investment banks, made the ride even more intense with their erroneous predictions. 

I remember talking to a client that had heard the Royal Bank of Scotland’s dead wrong prediction to “Sell Everything.” Fortunately, we did not.  This quarter has been a prime example of Dave Ramsey’s phrase, “the only way to get hurt on a roller coaster is to jump off”! As a side note, Dave reinforced this advice on 8/21/09 (2), which was another time that everyone was saying to sell. This would have been a big mistake too.  Warren Buffet put it a little more eloquently, “The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.”

You might be thinking “Yeah, yeah, but that is what you always say.  Isn’t there some caution that should be taken?”  We would say, “Absolutely!” Time tested principles such as diversification (bonds and real-estate were up nicely during the quarter), rebalancing and dollar cost averaging are proven ways to be cautious.  We also want to highlight that quarters like this remind us to have a healthy respect for the markets.  Investing is never a sure thing.  There is risk involved.  Fortunately, investors on average are rewarded for taking risk, but that does not remove it.  A good example of this is to not invest money in stocks that you will need to spend in the near term.  The chart in link 3 illustrates how risky stocks can be over short time periods and conversely how predictably rewarding they can be over long time periods.

If you would like more commentary on the first quarter, check out the first video link below. We know the election is on people’s mind, so look for next quarter’s e-mail for more on the election’s potential impact on the markets.

 

 

1https://www.youtube.com/watch?v=DgAwqZyxRqM&feature=youtu.be

2 http://www.daveramsey.com/blog/how-to-survive-the-roller-coaster-economy/

3 http://www.crsp.com/files/investments_illustrated/BP_h_2015_crsp_us-en.pdf

Thank you for your continued trust and business.  

-Zak

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