Unless you’ve been living under a rock for the first several weeks of 2016, you’ve probably noticed the wild ride most investors have experienced recently in the global financial markets.
Although major news outlets tend to prey on an investor’s fear when things go awry, the reality is there’s usually much more to the story than we’re led to believe.
Three areas of the financial markets that have received a lot of attention recently include…
- The relationship between crude oil and the financial markets
- China and their effect on the global financial markets
- Recent financial market volatility (i.e. the daily ups and downs)
Fortunately, our friends at Dimensional Fund Advisors have put together a few short pieces covering each of these areas of concern.
For your convenience, below is a brief summary of each article, my personal thoughts on the implications of each topic to the individual investor, as well as a link to PDF copies of the corresponding articles from Dimensional.
Crude Oil and Financial Markets
One of the biggest questions on investor’s minds is, ”How do falling oil prices impact stock market returns?”
As you can see from Exhibit 1 in the article, there is “…no evidence that falling oil prices predict declining stock markets.”
This article also points out how the energy sector represents a relatively small weighting (approximately 2-7%) across the various market indices.
This evidence suggests that an investor who is properly diversified among various sectors and asset classes shouldn’t be overly concerned about how oil prices might impact their portfolio.
An Update on China
Given all of the attention China has received in the media recently, many investors are understandably concerned about the size and impact of China’s stock market on the global financial markets.
As you can see in the article though, “…as of December 31st, 2015, the weight of China in the MSCI ACWI IMI, a market wide benchmark that includes all developed and emerging markets, was 2.58%.”
This typically translates into much less of an impact to the overall emerging markets portion of a globally diversified portfolio than most investors realize (as seen in Exhibit 2 of the article).
The article also discusses how Dimensional currently approaches investing in China’s stock market, providing some important insight into the strategy Dimensional uses to mitigate certain risks present there.
Certainly, China’s economy and financial markets influence the global economy in many ways, but investors who are globally diversified should decrease much of the risk associated with investing in a single country like China.
Recent Market Volatility
January 2016 was the worst start to the year for the S&P 500 index in history. So, does this mean the rest of the year’s stock market performance is doomed?
As you can see from Exhibit 1 in the article, the answer is a resounding NO!
In fact, what we find historically is that “…a negative January was followed by a subsequent 11-month return that was positive 59% of the time, with an average return of 7%, indicating a negative January does not predict poor market returns for the rest of the year.”
Another key point the article covers is that recent history has not necessarily been more volatile than previous historical periods.
Instead, what we see historically are “…periods of higher and lower returns as well as periods of greater and lesser volatility” (as outlined in Exhibit 3 of the article).
For the investor with a sound investment strategy, this article highlights the importance of maintaining discipline in the midst of a market downturn and increased volatility.
It also highlights the fool’s errand of trying to use “rules of thumb” to predict the future of stock market volatility and returns.
What does this mean for the investor?
So, what does all of this mean for the average investor?
For starters, market cycles are inevitable and economic uncertainty is the one thing that’s certain about the world of investing.
With that in mind, if you…
- Seek wise counsel from a trusted advisor (like SageOak)
- Have a rock-solid investment strategy
- And embrace time as a tool
…you’ll give yourself the best chance of achieving long-term investing success, regardless of current market conditions.
It’s important to work with an advisor you trust to develop an investment plan based on timeless wisdom and principles, backed up by decades of research in the field of financial science.
This advisor should also help you avoid the mistake of putting your hope and trust in the wrong thing (i.e. your money and possessions).
If you’re already a SageOak client, great! You’re already benefiting from these things!
But if you’re not a client and you’re concerned about how recent market events might impact your financial future, feel free to reach out for a complimentary second opinion regarding your investments or financial situation.
Together, we’ll explore whether or not your current investment plan is the right one, and if it’s not, we’ll discuss whether or not SageOak is the right firm to help you in the future!