Keep calm and invest on

In the face of volatility, it's now time to review investors' long-term strategies, take the long view, and remain calm.
JAN 31, 2016
By  MFXFeeder
These are the times that try investors' souls, to modify Thomas Paine, and these are the times when investment advisers earn their keep. Advisers should be reaching out to clients to provide reassurance that while the market decline in January represents one of the worst starts to a year in history, it does not mean it's time to pull all, or even most, of their money out of stocks. In fact, it is time to review investors' long-term strategies, and if they still make sense, to take the long view and remain calm in the face of the volatility in the stock and bond markets. Clearly, many investors — probably including mutual fund managers — have reacted to the stock market decline by pulling at least some of their money out of the market. They pulled $5.2 billion out of equity and hybrid mutual funds (which invest in both stocks and bonds) in the week ended Jan. 13 alone. Since the beginning of the year, they have pulled almost $10 billion from domestic equity and hybrid funds, and more than $3.1 billion from taxable bond funds, and during the last three weeks of 2015 they pulled $21.4 billion out of equity and hybrid funds. In addition, there have been large outflows from most domestic equity exchange-traded funds. The PowerShares QQQ ETF saw net outflows of $2.2 billion from Jan. 1 through Jan. 25. The SPDR S&P 500 ETF saw outflows of $2.2 billion in the same period. The iShares MSCI Emerging Markets ETF lost $1.7 billion to outflows, the iShares Russell 2000 lost $1.3 billion and the iShares Russell 1000 Value ETF lost $1 billion. The exception was the Vanguard S&P 500 ETF, which gained $1.7 billion in the period, suggesting those who were comfortable staying in equities moved to the large, low-cost institution.

SEEKING SAFETY

ETF flows showed investors generally running to safety as the iShares Short Treasury Bond ETF saw inflows of $2.2 billion in the period, while the iShares 20+ year Treasury Bond ETF pulled in $1.5 billion, the 7-10 Year Treasury Bond ETF gained $1.2 billion and the 1-3 Year Treasury Bond ETF gained just under $1 billion. Part of the problem is that the economic uncertainty around the world has been broadcast nonstop since late last year. Almost every day brings reports of the slowdown in the growth rate in China. This in turn generates reports of a decline in demand for commodities, which hurts commodity prices, including oil. The slow growth in China hurts U.S. and European exports to China, slowing the growth of those economies and raising the specter of recession. All of this economic uncertainty causes fear among investors, and some may worry the stock market decline is signaling that a recession is imminent, causing them to either pull money out of the market or hold off on new commitments. They should be reminded that Paul Samuelson, the late renowned economist, once quipped that the stock market had predicted “nine of the last five recessions.” Investment advisers should be reminding their clients that volatility is to be expected in the stock market. There have been periods of great volatility, and even periods of significant declines, in almost every decade. In fact, it is because of the volatility of stock prices that stocks provide higher returns than bonds over the long term. Without risk, there would be little reward. One way to avoid the volatility is to be in T-bills, which offer almost no return, not even enough to keep pace with the extremely low rate of inflation. Investors might suffer a temporary paper loss in stocks during a market downturn, but if they hold fast they will recover from that loss when the market recovers, as it always has. A loss to inflation is a permanent loss. The key role of investment advisers at a time like this is to be the calming voice of reason for their clients. Unless the investor has a short investment horizon, there is no reason to pull a significant amount out of the stock market.

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