How Bad is it?The S&P 500 We are now back to where we were at the beginning of 2019 in the value of the S&P 500 index. The climb took over a year and the drop took less than a month. We will see more declines before it is all over, but as of right now we have given up about 15 months of gains in U.S. Large Cap stocks.
What about income holdings?Even fixed income holdings like preferred stocks, exchange-traded debts and REITs are at lower prices now. Energy partnerships have seen their unit prices fall sharply with the drop in oil prices. It is not fun to see the market value decline like this in an income portfolio. Keep in mind that the market value does not impact the expected income. For the energy partnerships, the dividend yield (annual divided payment divided by market value) has shot up to 25% or more for some. This is not a time to sell these holdings. It might be a time to buy more. Most of the energy partnerships in our portfolios do not have commodity exposure and their businesses are not truly impacted by oil prices, they just get hammered along with the rest of the sector. Preferred Stocks The prices of these holdings are driven up when rates are dropping, which we have experienced the past few years. Now we are seeing the prices of preferred stocks be driven down by overall market momentum and fear. The difference between the 52-week high and the 52-week low is 20%. It is significant, but not as large as with common equities. What should you do now? The temptation to exit the market and avoid any more drops in value can be very strong when you see this decline. We understand that. The problem is that, just like no one could have predicted the timing of this decline, we also can’t predict the timing of the recovery. Leaving the market and getting back in later requires making two lucky decisions—when to leave and when to get back in. The chart below shows what you give up if you miss even one good day on the recovery side. The bright side The good news is that, if your portfolio is matched to your time horizon and your objectives, you are all set to weather the turbulence. There have been more good days than bad days in market history, and the good days have added up to significant long-term growth for investors. If history tells us anything, those good days will come again. Check out this graph for some perspective on how much more the good has outweighed the bad. Even the bad memories of 2000 and 2008 look like blips compared to the growth experienced by those who stayed invested throughout those periods.
Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations may vary. Therefore, this information should be relied upon when coordinated with individual professional advice.