By Charles Brown
I am not sure why, but when I think of the word “whipsaw*” I think of a crazy amusement park ride that spins you around every which way – sort of like the one pictured below. When the ride is over, you either throw up or come very close to throwing up.
That definition is very close to the investing definition of the same word. Here is Investopedia’s definition of “whipsaw” if you are interested. I will shorten the investing definition of “whipsaw” to mean: violent market fluctuations, in both directions, for seemingly no reason.
After a low volatility year like 2017, long term investors may have forgotten what market volatility looked like. 2018 reminded us how volatile markets can be. In just the past 30 days, we saw a great example of a whipsaw. The S&P 500 went down 15%** from December 1st 2018 to December 24th – a huge move. Then it proceeded to rally 10.5%** from December 26th to January 11th.
Some investors want off of this wild ride. But if you have five years or more until retirement and you have yet to meet your retirement goals, then you most likely need a rate of return over and above inflation to meet those goals – that means staying invested.
Well what if I lower my overall risk, or even go to cash, for just a little bit until things calm down?
It seems like a logical idea but by trying to avoid the market whipsaw you open your self up to a potentially unlimited amount of “what-ifs” which can lead to huge mistakes. What if if you are wrong? You sell today and the market keeps rising – where do you get back in? 5% up from here? 10%? And what happens if you get back in (after missing 10% to the upside) and then the market goes down 20% from there? Do you get back out? Or stay invested? What if you are right, and the market falls 10% – do you get back in then? If you do get back in, what if the market falls 10% from there? Do you get back out?
I love this bit from @oddstats (follow on twitter here) that shows the different “streaks” that the S&P 500 went through during the last two recessions. This is a whipsaw nightmare. Every double digit selloff was accompanied by a subsequent double-digit rally. If you had lowered risk or gone to cash at any point, certainly one of those massive double digit rallies would have tempted you back into the market, only to smash lower shortly thereafter.
The way you minimize investing mistakes in volatile markets is by picking an asset allocation you can stick with through all the ups and downs of the market – be an investor in that allocation. Your asset allocation should appropriately line up with your age, financial goals and risk tolerance. Along with global stocks, maybe your asset allocation includes bonds, cash, gold or alternatives to help reduce overall volatility. Whatever the allocation, you should be better off five years from now if you can stick with a diversified portfolio.
Now is a great time to review your asset allocation and decide if you can stick with it through a volatile 2019 and beyond. Sticking with your allocation through the next bear market does not help you avoid the market whipsaw, but at least you won’t throw up when the ride stops and you see the damage market timing did to your nest egg.
Charles Brown is a portfolio manager and financial advisor at M.Brown Financial Advisors in Naperville, Illinois
*An actual “whipsaw” is a long, double-handled saw used for cutting timber
**All returns are from Morningstar.com
*** “VIX” is the volatility index run by the CBOE – click here for more info
****The above article is informational in nature only and is not a recommendation to buy or sell securities. All information is gathered from sources believed to be reliable, but neither Charles Brown nor Ausdal Financial Partners, Inc guarantees the accuracy of the information. All investments carry a degree of risk. Individuals should consult with their tax and investment professionals before making changes to their investment portfolios.
*****Securities and Investment Advisory services offered through Ausdal Financial Partners, Inc, 5187 Utica Ridge Road, Davenport, IA 52807 (563)326-2064. Member: FINRA/SIPC. M.Brown and Associates / M. Brown Financial Advisors and Ausdal Financial Partners are independently owned and operated