Putting Things Into Perspective

Putting Things Into Perspective

March 19, 2020

By Tom Limoges
AVP - Investments 

With the current volatile and unpredictable market environment, it’s important to put things into perspective. Last week, we moved into bear market territory (-20% from market highs) and have seen further drawdowns this week. Uncertainty remains high, causing investors to question their approach.

During this challenging time, we stress the importance of staying diversified and sticking to your investment plan. The past month, we have had many discussions with clients regarding the markets and how they relate to their investments.

Chart: S&P 500 Declines vs. Returns

Have We Been Here Before?

Often, we are asked the question “Have you ever seen anything like this decline?” The short answer is yes, we have been here before. Maybe not as suddenly, but this type of drawdown has happened more times than you might have expected over the last 40 years. Drawdowns of 30% or more might not happen very often, but they do occur. What we are experiencing now is not new.

Chart: S&P Performance Since 2009

Taking the Long View

The chart above shows the performance of the S&P 500 all the way back to the market trough of 2009. Over the last 10-plus years, the market climb has not been a straight line; rather there have been times of choppy moves and events that created uncertainty and raised volatility levels. Even during this volatile time period, we remain significantly higher than where we were at the beginning of 2009.

Chart: Risk of Loss Over Time

For further perspective, consider the risk of market losses in shorter-term time periods vs. over the longer term. Over short term (1-year) going back to 1926, there is almost a 30% chance that the market will decline within that year. However, as you take the long-term view and span multiple years, or even decades, the odds of a negative return are greatly reduced.

Chart: Importance of Diversification

Why Diversification Matters

During times of market volatility, diversification plays a significant role in the preservation of assets. The chart above shows the performance of an all-stock portfolio (Vanguard Total Stock) represented by the green line. The blue line represents a 60% stock/40% bond portfolio (Vanguard Balanced). Over longer term time periods, the all-stock mix generates a higher rate of return. Over periods of market stress like the financial crisis of 2008-09, the balanced portfolio protects on the downside and because of that, recovers faster than the all-stock mix.

In times of uncertainty and distress, we sometimes lose sight of the bigger picture. The saying, “it’s hard to see the forest for the trees” is an appropriate description for this time. If we fixate on short-term losses, we can become blinded to the overarching historical trends and projections. Well-balanced investments see both: the forest is made up of the trees. One is not without the other. Short-term knowledge informs long-term payout, but it doesn’t need to replace or control huge changes in your investment plans.

Please know that your SNB Wealth Management partners are paying close attention to the latest news and updates every day. Follow our resource page for all of the latest updates.

About the Author

Tom Limoges

Tom Limoges is an Assistant Vice President in Investments, developing investment strategies for Security National Bank's Wealth Management Division. He holds an M.B.A. from Wayne State (Neb.) College, and has been a member of the SNB Wealth Management team since 2002.