On Friday, August 5, the United States’ debt was downgraded from the highest rating of AAA to AA+ by Standard & Poor’s (S&P). The downgrade was announced after the market closed on Friday. Stocks had already been under pressure and as a result of the downgrade and investors being overwhelmed by the numerous opinions of talking heads over the weekend, the following Monday experienced investors exiting the market en masse. Subsequently, equity markets came under heavy pressure and unease mounted about the strength of our economy.
The timing of the downgrade may have been a bit of surprise to some, but S&P had put the US on notice for a downgrade months in advance. Contrary to the doom-and-gloom view of the media, the downgrade, in and of itself, is a fairly manageable issue. Economically, it changes very little in the short run as witnessed by increased demand for Treasuries that Monday. No one is suggesting that the United States will be unable to pay its current obligations. However, the downgrade served to further damage investor sentiment.
Volatile days in the market may bring to mind the dark days of the Financial Crisis of 2008-2009. Then, investors were grappling with a potential collapse of the entire banking system. Fortunately, the problems we currently face are not as dire as then. The downgrade may cause interest rates to rise, but no one is suggesting that the banking system is poised for failure. Corporations have had healthy earnings growth over the last several quarters and have deleveraged their books so that they remain in strong fiscal positions. This is good for both the equity issues of those corporations as well as their bonds. And it is worth reiterating, no one doubts the United States’ resolve or ability to pay its current debt obligation.
Stock market turbulence serves to remind us that what goes up can come down — and that overall risk is as important a variable in the investment equation as overall return. The value of a disciplined asset allocation process that focuses on both risk and return becomes even more important, especially to the serious, long-term investor. One of the key reasons why we employ not only traditional stocks, bonds and cash, but also alternative investments is to dampen volatility in times like these.
Past performance is no guarantee of future results and diversification does not guarantee a profit or protect against loss. We believe that in any market environment, investors should be diversified across a variety of asset classes.
As you react to the news and volatility of the market, please keep the following in mind:
- Panic is not an investment strategy.
- Diversification can dampen volatility.
- Don’t make short-term decisions that may jeopardize your long-term goals.
- Regularly review your goals and time horizon.
When we work with clients to develop diversified asset allocation recommendations, we base our recommendations on a discussion of the client’s investment time horizon, investment goals, and tolerance for risk. If these remain the same today as when we originally developed the portfolio, short-term market volatility should not have a major impact on the portfolio’s long-term performance. If these factors have changed, then a review of circumstances should be conducted to modify the portfolio accordingly.
As succession planners, we are committed to helping our clients prosper in the years ahead. Please call if you have questions or would like to schedule a meeting to review your current situation. We can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon, and risk tolerance.
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