Balancing opportunity, volatility and perspective: An investor's guide

05.07.20

Build a plan to pursue your goals through all market cycles

Global investment markets can be especially turbulent during periods of rapid economic change, such as the reaction to the coronavirus (COVID-19) pandemic in February and March 2020.

Sharp movements up or down in the stock market can challenge even the most seasoned investors. When market conditions appear to become unfavorable or economic news becomes unsettling, the uncertainty can prompt investors to head for the exits and ask questions later. But history shows that the stock market has withstood the test of time. Staying focused on long-term goals can help you through turbulent markets. The chart on these pages shows the S&P 500 Index has continued an upward trend over the long term despite periods of price decline. Bull and bear markets haven’t lasted forever, and investing opportunities often follow the most uncertain market conditions. While market downturns like the COVID-19 pandemic can be discouraging, long-term trends show that the stock market has rewarded patient investors.

STOCKS HAVE REWARDED PATIENT INVESTORS
S&P 500 Index, 03/31/1970 – 03/31/2020 Chart Showing STOCKS HAVE REWARDED PATIENT INVESTORS
Chart Showing STOCKS HAVE REWARDED PATIENT INVESTORS

Source: Morningstar Direct. The S&P 500 Index is a float-adjusted market capitalization weighted index that measures the large-capitalization U.S. equity market. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.

The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

A pandemic recession

The COVID-19 pandemic that began in first quarter 2020 has caused one of the most rapid and dramatic global economic downturns in history. The S&P 500 Index dropped 34% from record high in February to trough in late March.

Global economic activity practically came to standstill as countries, municipalities and businesses implemented social distancing plans to isolate and help protect people from possible exposure to the virus. Remarkably, within about 30 days, we moved from a relatively strong domestic economy with financial market indexes hitting record highs, to a global recession. Even more astounding, we may not realize the totality of the tragic human consequences of the COVID-19 pandemic for several months.

The economic landscape continues to evolve and the heightened market volatility reflects that uncertainty. It can be hard to maintain a broad perspective when markets are unsettled like we currently are experiencing. However, it is important to remember that your investment timeline probably extends longer than next week or next year — or for some of you, even five, 10 or 20 years. Long-term investors who use history as a guide recognize that staying focused on financial goals requires the ability to navigate through all market cycles.

Let time work for you by staying invested

Some people believe investing is a matter of timing. They say it’s best to invest heavily in stocks when the market is going up, then get out when the market starts going down. But there’s a problem with that strategy: Even the smartest investment professionals can’t accurately predict the exact timing of such market moves.

We believe long-term investment success is more likely to be the result of a consistent approach, based on time in the market — not market timing. For example, selling when markets decline can put you on the sidelines when stocks change direction. Turnarounds can happen quickly and typically are strong in their early stages.

Missing even a few of the stock market’s best single-day performances could have a significant effect on your portfolio.

COST OF MISSING THE MARKET
Average annual total returns of the S&P 500 Index for the 20-year period ended March 31, 2020 Chart Showing COST OF MISSING THE MARKET
Chart Showing COST OF MISSING THE MARKET

Source: Morningstar Direct. The S&P 500 Index The S&P 500 Index is a float-adjusted market capitalization weighted index that measures the largecapitalization U.S. equity market. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.

Stay committed to your plan — good years have tended to follow bad

Chart Showing Stay committed to your plan — good years have tended to follow bad

Source: Morningstar Direct. Based on annual returns of the S&P 500 Index, 1926–2019.

History shows that it’s rare for the stock market to have two bad years in a row, and even more rare to record three bad years in a row. And when the market has recovered from downturns, it historically has done so with powerful rallies.

Even in the worst 20-year period the stock market has ever experienced — 1928 to 1948 — the S&P 500 Index posted an average annual gain of 0.55%. While a modest amount, remember that those two decades included the Crash of 1929 and the Great Depression of the 1930s, when unemployment soared to 25%, U.S. gross domestic product plunged by more than 30% and land values plummeted more than 50%.

Despite the economic challenges of those difficult years, a patient and committed investor could have had a positive return on money invested in the stock market.

GOOD YEARS HAVE TENDED TO FOLLOW BAD YEARS IN THE U.S. STOCK MARKET
Chart Showing ESTEE LAUDER COMPANIES INC. CLASS A
Chart Showing ESTEE LAUDER COMPANIES INC. CLASS A

Source: Morningstar Direct. Annual returns of the S&P 500 Index Jan. 1, 1970, to March 31, 2020. Bull markets are noted in green, bear markets in black. Results assume reinvestment of dividends. The S&P 500 Index is a float-adjusted market capitalization weighted index that measures the large-capitalization U.S. equity market. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.

Use history as a guide when reviewing your investments

Bull markets historically have lasted three times longer than bear markets.

Bear markets can test even the most steadfast long-term investors, but they historically have lasted only a short time compared with bull markets.

As you can see in the chart below:

  • Prior to the COVID-19 pandemic, the eight down markets since 1970 lasted an average of just 14 months.
  • The nine up markets during that period lasted an average of 54 months, ranging from as few as 24 months to as many as 129 months and counting.
  • The average bull market gained 170.3% while the average bear market lost 28%.

Bull markets historically have lasted three times longer than bear markets
Chart Showing ESTEE LAUDER COMPANIES INC. CLASS A
Chart Showing ESTEE LAUDER COMPANIES INC. CLASS A

Source: Morningstar Direct. Results are based on an initial $1,000 investment in the S&P 500 Index Jan. 1, 1970, to March 31, 2020. Bull markets are noted in green, bear markets in black. Results assume reinvestment of dividends. The S&P 500 Index is a float-adjusted market capitalization weighted index that measures the large-capitalization U.S. equity market. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.

S&P 500 INDEX: FROM BEAR MARKETS TO RECORD HIGHS
Trough Date New peak date Months to new record high

05/26/70

01/11/73

39.8

10/03/74

11/28/80

91.5

08/12/82

8/25/87

23.5

12/04/87

3/24/00

23.4

10/09/02

10/9/07

87.4

03/09/09

2/19/20

66.6

03/23/20

Source: Standard & Poor's Corporation, Haver Analytics, Ivy Investments. Number of months based on 30-daysper- month.
Past performance is not a guarantee of future results.

Focus on the future and diversify your investments

A mix of investments can provide the potential to take advantage of return differences among investment types and help protect you from price swings in just one of them. While diversification does not ensure a profit or protect against loss, it can help reduce the overall risk and volatility of your investment portfolio.

Let’s look at the growth of $10,000 invested during the period March 31, 2000, through March 31, 2020. A hypothetical diversified portfolio of stocks, bonds and money market securities would have helped manage market volatility during this turbulent 20-year period.

Growth of $10,000 investment (2000-2020)
Chart Showing Diversity in investments
Chart Showing Diversity in investments

Source: Morningstar Direct. Past performance does not guarantee future results. Diversification does not ensure a profit or protect against loss. This is for illustrative purposes only and not indicative of any investment. The data assumes reinvestment of income and does not account for taxes or transaction costs. Treasury bills are guaranteed by the U.S. government and offer a fixed rate of return, whereas both principal and yield of an investment in stocks fluctuates with changes in market conditions. Large company stocks are represented by the S&P 500 Index, long-term government bonds by the Bloomberg Barclays U.S. Treasury: Long Cumulative Return Index, and money market (Treasury bills) by the Bloomberg Barclays U.S. Treasury Bill 1–3 Month Index. It is not possible to invest directly in an index. Government bonds and Treasury bills are guaranteed by the full faith and credit of the U.S. government as to the timely payment of principal and interest. Generally, as interest rates rise, bond prices fall. U.S. government bonds may be exempt from state taxes and income is taxed as ordinary income in the year received. With government bonds, the investor is a creditor of the government. Stocks are not guaranteed and have been more volatile than the other asset classes.

CHANGE MAY BRING OPPORTUNITY

We live in a time of rapid change, economic growth and technological innovation. Such factors often bring opportunity for the right companies and potentially for investors. History shows that patient investors who remain focused on the long term may withstand turbulent periods and take advantage of the opportunities that global change can bring. Our investment team uses a disciplined, collaborative research process to track global change and its potential opportunities. Work with your financial professional to create a plan that can help you find the right opportunities for your long-term goals.

REMEMBER A FEW KEY INVESTING CONCEPTS

  • Follow a solid investing strategy rather than emotion.
  • Don’t let a short-term reaction overtake your long-term plan.
  • Invest regularly and stay committed to your goals.
  • Work closely with your investment professional to consider all your investment options.

Investing is subject to market risk and it is possible to lose money while investing.


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