Here at FormulaFolios we’re having a great year of firm growth. As a result, we have many new clients that are getting their first experience with our investment philosophy.
Any time you’re doing something new with your portfolio, it’s perfectly natural to pay special attention, and even feel a little bit anxious. Especially if the first month is less than you expected. For many of our new clients, this might be exactly how you feel. And it’s okay, we completely understand!
The Past 6 Years Have Been Great
The past few years have been very good to investors, with many growth oriented asset classes up more than 100%. There has been minimal volatility too, with the largest drawdowns in US Stocks mostly less than 5%. This has probably gotten a lot of us to forget what a real correction feels like – as it is fairly normal for US Stocks to have intra-year drawdowns greater than 10%.
The past 30 days have been interesting. Stocks have mostly been flat to slightly down, with every few percent rally seeming to be followed by a few percent drawdown. Bonds have also been down, real estate down a lot, as well as non-US stocks. In a nutshell, every major asset class is either flat, slightly down, or down a few percent.
As this relates to FormulaFolios, we believe in following non-emotional formulas to help us make sound investment decisions. Part of our formulaic process is using well defined asset allocation for each client. This ensures we properly spread risk amongst many asset classes, while emphasizing the asset classes our models calculate to be the most desirable for current market conditions.
It’s a sound philosophy that has served us well for many years. But, it’s not without flaws and certainly doesn’t mean we’ll avoid all short term market downturns.
Case in point would be the last 30 days.
There’s More to the Market than Just the Dow and S&P 500
Below is a chart that shows my (Jason Wenk – FormulaFolios Chief Investment Strategist) SEP IRA. This is invested in what we call an MM80 portfolio. The MM80 invests 80% for growth and 20% for income (hence the 80), and uses Multiple Managers (hence the MM) in the allocation. Since I’m 20+ years from retirement and have a moderately aggressive personal risk tolerance, I feel it’s appropriate for my financial goals.
Along with the last 30 days of performance for my personal investment account, I’ve also mapped the results of quite a few major investment asset classes. This helps us see visually how my account compares to the general volatility of financial markets.
For those not familiar with all the market proxies in my chart, this might help a little:
– Orange represents Small Cap US Stocks
– Yellow represents the Total Bond Market
– Green represents International Stocks
– Light Blue represents Commodities
– Dark Blue represents Real Estate
– Pink represents the S&P 500 (Large Cap US Stocks)
When we look at how all these market proxies have done over the past 30 days, we realize that our portfolios are doing just fine. We’re behind just Large Cap US Stocks and the Total Bond Market, but equal or better than all other major asset classes. Since my particular account is down just less than 2%, I’m not worried at all.
Avoid the Big Drops, Ride Through the Small Ones
FormulaFolios are designed to help us avoid “The Big” losses, not necessarily the small ones. A 2% decline isn’t fun, but it’s a far cry from losing 10%, 20%, or more. As investors, we always need to do our best to remain emotionally strong, in spite of the natural fears we experience when it comes to seeing the value of our money go down (even if just a small percentage).
This patience is really important to investor’s long term success because more often than not, small losses are recovered easily by patient investors. In just the past 12 months, for example, the S&P 500 has dropped 2% or more 9 times (including twice in the past 30 days). Over that 12 month time period the S&P 500 is up approximately 12%, and has reached a new all time high 8 times after these 2% or greater declines.
When our models see major market risk on the horizon they’re designed to move to safer asset classes. It’s not always a perfect science, and no investment model can guarantee against experiencing some risk. At this time the models are cautious about the future, with many parts already moving to more defensive asset classes. Overall though, a few percent correction after years of booming markets, is perfectly natural and nothing to panic about.
Hopefully this post helps all our clients and friends, and especially helps those that are new to our firm feel confident and comfortable with your decision.
Chief Investment Strategist
FormulaFolio Investments, LLC