While I was busy reviewing accounts and holdings for your Q1 2025 Performance Report, the world was rocked with a couple days of extreme volatility that appears to be continuing into next week due to adjustments in the tariffs for virtually every country announced by the White House Wednesday afternoon. Quite a bit different than what everyone anticipated. Because of this, I thought it best to get an email to you ahead of the quarterly reports.
First, my opinion on why this is happening. When you see market corrections like this, you may be thinking that the end is near. What I’d like to remind everyone is that this is not the first correction of this magnitude and I doubt it will be the last (discussed again later).
Businesses are still making products and offering services. What nobody knows for sure is the level of profit or earnings those businesses will have with the tariffs in place. What was built into models that money managers use to determine the value of a company last year may be different this year. They simply don’t know how the tariffs will impact earnings. And, what I’ve become accustomed to since starting my career in 1986 is that markets do not do well with uncertainty.
Also, nobody is certain of how (or if) the tariffs will impact the consumer. I’ve read many articles over the past week about this subject and it seems that it boils down to tariffs being equated to a “use tax”. If you don’t buy anything, tariffs don’t impact you. What you buy could impact you more or less depending on the product, where the parts came from, where it was manufactured, etc. Does this mean the end is near? Not in my opinion, but it certainly doesn’t feel good.
Second, please know that your portfolios are diversified based upon the stage in life you are in along with personal discussions we’ve had related to your tolerance for risk. I’ve spoken about diversification on a number of occasions in my newsletters and to you personally. The topic seems to come up anytime the “market” has a big negative or positive change. Why negative and positive? The goal of diversification is to reduce the volatility of a portfolio. Volatility is movement, both positive and negative. So, when “the market” moves higher and your portfolio doesn’t match that return, blame diversification. When “the market” moves lower and your portfolio doesn’t match that return, thank diversification. Basically, your portfolio will most likely not be down to the extent that “the market” is in this case. If you are concerned and would like to discuss the impact last week had on your portfolio, I’m available. Click HERE to schedule a day and time that work best for you.
So, with all of this considered, what should we do? “Deer in the headlights” or “head in the sand” are not options. “Hope”, while wonderful for your mental state, is not a strategy. In trying to explain to you what to do during these circumstances, I was directed to a letter to investors in 2017 that famed investor, Warren Buffett wrote to the stockholders of Berkshire Hathaway, “…should a major decline occur, heed these lines from Rudyard Kipling's classic poem "If,":
"If you can keep your head when all about you are losing theirs ... If you can wait and not be tired by waiting ... If you can think — and not make thoughts your aim ... If you can trust yourself when all men doubt you ... Yours is the Earth and everything that's in it."
It's worth noting that Buffett was writing about major declines in the stock market, such as periods like the 2007 to 2009 bear market during which the S&P 500 lost more than 50% of its value. Those are quite a bit rarer than what's happening now. In fact, corrections in the stock market happen frequently. There have been 21 declines of 10% or more in the S&P 500 since 1980, with an average intra-year drawdown of 14%, according to Baird Private Wealth Management.
But whether a decline is modest and short-lived or what feels long and painful, the message is the same: Stick to your long-term plans. Buffett writes that he views downturns as "extraordinary opportunities." Why? Because, historically, it's never been all that long before the market resumes its upward trajectory. Since 1928, the average bear market — defined by a decline of 20% or more from recent highs — has lasted less than 10 months, according to data from Hartford Funds.
While some economic indicators may be softening, it is wise to not underestimate the resilience of the US economy and our ability to overcome. Whatever the coming months may hold, I do want to remind you of a few things that might help you sleep better at night:
- First, as always, I am monitoring your accounts and the markets -- and will keep you updated if things come up that warrant a change to your accounts.
- Second, remember that our investment process is designed to help you reach the goals of your financial plan – and I continue to follow that process, avoiding emotion, throughout market cycles. Often the process helps smooth out some volatility as noted above, but at the end of the day, what’s most important is that you reach the goals we’ve set forth in your plan.
While no one has a crystal ball, I feel confident that we’ll get through this together. If you need anything, please know that I am available for phone calls, online video meetings, or just a quick email. Thanks for putting your trust in me. I’ll continue to watch out for you!