The past three months in the investment markets were relatively calm compared to the end of the second quarter when the surprise Brexit vote briefly caused investors to panic. Despite that panic, international developed market stocks had a strong third quarter, finishing up 6.5% and are up for the year over 2%. International emerging market and U.S. small company stocks led the way this quarter with returns of around 9%. Large company U.S. stocks were also up almost 4% for the quarter and are up almost 8% for the year. Last quarter's strongest performing asset classes were commodities and real estate. This quarter they put up negative returns of 4% and 1%, respectively, proving again the value of diversification. Bonds were relatively flat on the quarter with the Barclays Global Aggregate index up just under 1%.
The next three months might not be nearly as calm. In fact, you should probably anticipate they won't be, given the upcoming election and the potential for another rate increase at some point. We've had many clients express concerns over what is going to happen to the markets after the election in November. You'll see countless articles and news features from "experts" on what will happen if either candidate is elected. But the truth, as always, is that nobody knows.
So don't listen to them. Instead, prepare yourself for volatility in the markets. If you know the markets might take you on a roller coaster ride, it's easier to just sit back and close your eyes. Don't pay so much attention to what impact the election will have on your portfolio. The temptation will be there to make a change to your portfolio before the election. That would be a major mistake. Why?
First of all, timing the markets has proven to be an impossible exercise for anyone who attempts to do so. Picking the right time to get out of the markets is nearly impossible and then picking the right time to get back into the markets is even harder. Second, you have to decide where you'd put that money. Nobody can accurately predict what asset class will do best after the election and you don't want to just keep it in a cash account that is earning less than 1%. Cash is an important part of a diversified portfolio but it should never make up 100% of your portfolio. Inflation is gradually starting to increase and could be back to the 2-3% range by early next year. That means your cash is guaranteed to lose 1-2% per year or a real return basis.
You need to have some stock exposure, even if it might be scary at times. Regardless of who the president has been, the stock market has always provided strong returns over the long term. The chart below from Dimensional Fund Advisors shows the growth of the S&P 500 highlighted by the president and political party in power over each period of time:
Yes, there will likely be more volatility in the markets over the next quarter. There's even a chance your portfolio will lose money. In the short term there is always that chance because markets can't go up all the time. Don't stress about it. You have a diversified portfolio in place with exposure to multiple asset classes for a reason. Instead focus on what the next president will mean for the future of our country. That is much more important than what it will mean for your portfolio. And be sure to get out there and VOTE!
The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.
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