Market decline and volatility – what does it mean for my portfolio?

Updated: September 1, 2015

You may have heard or noticed that the stock market has been going through a bit of a rough patch. As of Tuesday, January 22, US stocks, as represented by the S&P 500, were down nearly 11% year to date, and over 16% from their most recent high point on October 9, 2007. This latter drop, being larger than 10%, qualifies as a “correction.”

Non-US stock markets have suffered similarly. The table shows the returns of various indices over the same time periods. Non-US equity markets have declined slightly more than the broad US market, and US real estate significantly more.

  Returns Since
Market Index 9/10/07 31/12/07 31/12/06
US Large Company S&P 500 -16.3% -10.8% -7.6%
US Large Company DJ Industrial Average -15.5% -9.8% -3.9%
International iShares MSCI EAFE (EFA) -17.4% -11.2% -4.8%
Emerging Markets iShares MSCI EM (EEM) -16.4% -12.2% -15.6%
US Commercial RE Dow Jones Wilshire REIT -25.9% -7.9% -27.2%
Commodities Dow Jones AIG Commodities 6.9% 0.2% 11.3%
US Bonds Lehman Brothers Aggregate Bond 6.0% 2.6% 10.4%
Inflation Protected US Bonds iShares Inflation Protected Bond (TIP) 8.1% 3.3% 10.6%

On the other hand, bonds and commodities are up approximately 6% since October 9, as measured by the indices or index funds we report.

If we look back to the end of 2006, stock index returns are much less negative, bond returns are positive and Emerging Market equities are still enjoying significant net gains. So, if you’ve been investing since the end of 2006, your portfolio is probably down less since then (than since the end of 2007), and it may even be up a bit.

You might reasonably ask:

My short answers are:

Now, for my longer answers. You certainly don’t have to read them, but they provide more detail than my somewhat cryptic short answers.

What is causing this decline?

While no one really knows (this is the kind of event that economists will be arguing about for years), there are two widely accepted (and inter-related) candidates: the “sub-prime crisis” and the anticipated arrival of a recession.

Is my portfolio at risk?

Well, is my portfolio at more risk than usual?

As an investor, what should I do?

Please contact me if you would like to discuss these issues or any concerns you might have with me directly. I will not be able to provide any more certainty about what is happening or what is going to happen, but I can certainly help you think through what to do.