Market volatility: Don’t just do something; stand there

We often talk about market volatility in the midst of surprise drops, but it’s useful to consider during calmer moments what behavior could be best for your accounts. When markets are in turmoil and account balances start to fall, many people feel a strong temptation to do something to “stop the bleeding” and cut their losses. But it’s often the case that staying the course proves to be the better path in the long run — and sometimes in the short-terms also. As we look back at the extreme market volatility that began at this time last year (Q4 2018), let’s consider how a few different investing scenarios would have played out. According to an analysis done by Vanguard, a hypothetical 60/40 stock/bond portfolio worth $1 million on November 1, 2018 would have lost 5.7% of its value by Christmas Eve. Yet selling the portfolio at that time and getting out of the market, even briefly, would have cost an investor tens of thousands of dollars in two months, compared to the alternative of staying fully invested. When faced with a similar situation, think about how you might feel if markets rebounded and you could have earned back all your

November 11, 2019 No Comments

Steps to take in a jittery market

It’s difficult (if not impossible) to say what stocks will do in the near term. And well-meaning investors who are trying to do the right thing by not being too hands-on with their portfolios (see this market timing article) can end up, inadvertently, with an investment mix that’s too risky, simply because they’ve been letting their winners ride. So, here are five steps to conduct a quick portfolio stress test to see if it’s time to talk with your Azzad advisor about making a change. 1. Check up on your baseline stock/fixed income mix In strong markets like the bull market that has prevailed since early 2009, most investors tend to leave well enough alone. But if you haven’t reviewed your portfolio’s allocations recently, use the market volatility as an impetus to do so. A hands-off portfolio that was 60% equity/40% fixed income in early 2009, for example, could be more than 80% equity today. And meanwhile you’re older, which means you should likely be in more conservative investments. Rebalancing is in order in many situations. As discussed here, rebalancing can help align your portfolio’s allocations with your risk tolerance, which is your ability to withstand losses without having to

September 4, 2019 No Comments

Lessons from yield curve history

Stocks were under pressure for much of August as U.S.-China trade tensions escalated, with Washington and Beijing announcing escalating rounds of tariff increases. Worries over the economic outlook rose, highlighted by a Treasury rally that sank yields and resulted in an inversion of the main measure of the U.S. yield curve, with the 10-year yield falling below the 2-year rate—a phenomenon viewed as an often reliable recession indicator. Markets tend to keep moving higher immediately following a yield curve inversion. Since 1978, the S&P 500 has risen an average of 13% from the first time the spread inverts on a closing basis to the beginning of a recession, according to Dow Jones. Since 1956, past recessions have started on average around 15 months after an inversion of the 2-year and 10-year yields. Of course, past performance cannot guarantee future returns. Even if the yield curve means a recession is on the way, that shouldn’t necessarily be a red flag for investors. Contrary to what you might think, stocks actually rose during half of the last 14 recessions, and they were positive in 11 out of the 14 years leading up to a recession. The stock market was down a year

September 4, 2019 No Comments

Market timing can cost you money

Over the past year and for periods of five, 10, 20 and 30 years, the average mutual fund investor has underperformed the markets for both stocks and bonds, according to research firm Dalbar. The Dalbar data leads to the inescapable conclusion that most investors are really terrible at investing. They panic and sell at the wrong moments, hurting their chances of success. The shocking reality is that investors actually made themselves poorer by giving in to their whims. Just look at the Dalbar results for 2018. The inflation rate was 1.93 percent, which means that investors would have had to earn that just amount to tread water. Instead, the average stock fund investor lost 9.42 percent, for a gap of more than 11 percentage points! Consider a few more dismal data points for stock mutual fund investors. Compared with the S&P 500, through Dec. 31, 2018, those investors underperformed by: — 5.88 percentage points, annualized, over 30 years; — 3.46 percentage points, annualized, over 10 years; — 4.35 percentage points, annualized over 5 years. The lesson investors can learn from this research is the value of staying the course and not making any sudden moves. According to Dalbar president Louis

September 4, 2019 No Comments

Getting ready for the next recession

It’s only natural to talk about what might be ahead for markets and the economy. We’re currently living through one of the longest economic expansions on record (120 months and counting). This means looking ahead to the next recession. A recession, sometimes called a “contraction,” refers to a decline in economic activity and is, unfortunately, a fact of life in the business world. They can sometimes trigger steep declines in the stock market, and that’s one of the reasons we are always on the lookout at Azzad. We need to know where markets might be headed when the next recession happens, which it inevitably will. It’s not a question of “if,” but “when.” Research shows that although there have been 11 recessions since World War II, only three of them triggered particularly severe market downturns: 1973-1975 (market decline of 48%), 2000-2001 (market decline of 49%), and 2008-2009 (market decline of 56%). Looking at the causes of each of those recessions/bear markets, each of them followed a unique series of circumstances in economic history. The 1973 recession was triggered by an oil embargo targeting the United States, and the 2000 and 2008 recessions were largely due to bubbles in the internet

August 1, 2019 No Comments

Pop quiz: When did the Dow last drop as much as it did today?

Short answer: Who cares? You’re not selling today, so don’t fret. Longer answer: The last time was eight months ago, but let’s put things in context. The Dow dropped by more than 800 points today — an amount that definitely catches attention. But in the grand scheme of things, it’s just a blip on the radar. So, what happened today? Basically, interest rates. Treasury yields have surged lately, specifically the yield on the 10-year U.S. Treasury note. It spiked last month and has continued its rise into October. A rise in yields means higher borrowing costs for corporations and investors. It also makes stocks look less attractive compared to bonds (For the pros out there, higher yields also make stocks look more expensive because of a higher “discount rate.”) On top of that, richer rates of so-called risk-free bonds can attract investors away from equities, which are perceived as comparatively riskier. MARKET CONTEXT Over the past two years, U.S. markets have soared. The Dow Jones Industrial Average gained more than 7,800 points in 2016 and 2017, and has continued rising this year. Dramatic numbers reported during the volatility of the first days of February kicked off a rockier 2018 than

October 10, 2018 No Comments