2017 is more than half over now, and a lot has happened. In case you haven’t heard, international stocks are killing it. The Matson Money International Fund is up almost 14% through the first half of the year. The following is commentary from Matson Money on the 2nd quarter in the markets.
The 2nd quarter of 2017 saw a continued increase in broad equity markets, both at home and internationally. During this time period, U.S. stocks grew by 3.09% as represented by the S&P 500 index, and for a second consecutive quarter, international stocks fared even better, with the MSCI EAFE index returning 6.37% for the quarter. After lagging behind for much of the previous couple of years, Emerging Market stocks once again led the way over developed markets for the 2nd consecutive quarter. The MSCI Emerging Markets Index saw a return of 6.38% for the quarter, and is now up over 18% year to date.
Over the course of the last year, we’ve seen strong market returns, the lowest unemployment numbers we’ve seen in recent history, and continued low interest rates and low inflation. By almost any normal metric the economy is looking very healthy and has for quite some time. During extended time periods of good economic data and favorable stock returns, investors can sometimes begin to feel euphoric – like things will stay good forever. In fact, over the last 18 fiscal quarters, the S&P 500 had a positive return in 17 of them, with only one negative return in the 3rd quarter of 2015.
In times when markets are down and seem as if they are never coming back up, we stress that it’s extremely important not to lose sight of one’s long term goals, not to panic, and to use downside volatility as an opportunity to rebalance and buy more equities. These same principles apply during bull markets as well. That euphoric feeling that investors can feel when it seems like markets will go up forever can lead to imprudent decisions in the same way fear can in a down market. Investors tend to overestimate their aversity to risk in these market conditions and take on greater exposure to equities than their true risk tolerance would dictate. In both scenarios, it is important to not get caught up in recency bias – assuming that whatever is happening in the short term will persist into the long term. Short term trends are just that – short term. Throughout the life of the stock market bull markets have been followed by bear markets and vice versa many times over.
It is an important distinction to understand the difference between academically proven ways in which markets move as compared to short term trends. Over the long term, equities have outperformed risk free investments such as treasury bills, but this is not going to be true over every short time period. Similarly, small stocks and value stocks have outperformed large stocks and growth stocks respectively, but again, this isn’t necessarily true over the short term. In fact, looking back historically, sometimes investors have had to wait many years before these various premiums have shown up, but the prudent investor who understood that these premiums are pervasive in the long term and have ignored short term trends have very often been rewarded for doing so. That is why it is so important to own a diversified portfolio built specifically for your personal risk tolerance, to stay prudent and to keep that portfolio through the ups and downs of the market, and to rebalance when the opportunity presents itself.
In the end, choosing a wise financial strategy – and sticking to it – can have tremendous impact on an investor’s long term financial health. Chasing performance through buying and selling is a risky game. Historically speaking, it will only reduce an investor’s real return. Relying on unbiased, non-emotional advice from a trusted investor coach to make good decisions can help an investor bridge that gap between what the average investor makes and the return of the market.
By Jimmy Hancock
- 2017 Happy New Year Sign. Digital image. Vectoropenstock.com. N.p., n.d. Web. 25 July 2017.
- Matson Money. “Account Statement.” Letter to James Hancock. 20 Apr. 2017. MS.