Hi, I'm Matt Finn, Chief Economist with Old National Wealth Management. Joining me today is Don Molé, our Senior Economist and manager of our exchange-traded fund strategies. Let's talk about market volatility. We've seen some big days in the market, some big swings in the market. Do you think that it's really due to the shifting economy, the shifting outlook for the economy, or is there something else feeding this volatility?
The volatility has to do with the changing of the economic dynamics, which means that we're getting more defensive with our economy right now. So investors are shifting from cyclical type investments to more of a defensive posture.
You know, one of the problems we ran into last year is this concept of maybe high water mark investing, where, as you know, portfolios ran up until September or October, and then we had a difficult end to the year, and investors really used that as sort of a benchmark but the problem is they made so much money in the preceding nine years from the '09 lows, it's hard to get them to focus on the time frame, the longer time frame. How do we address that, how do we get investors to maybe focus on different or longer time frames in terms of investing?
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The average is, for the equity market, we should expect to receive about 8% return per year. So if you look at over the past 10 years, we've far surpassed that. So for us to have a pullback at this point, it's a fairly normal situation. So investors need to focus more on the long term and look at their average returns, which have been very good.
Oh I agree, and one of the problems we ran into last year was investors had a lot of embedded capital gains over the last 10 years. So when the market started to rotate into more defensive sectors, we saw a lot of capital gains recognition toward the end of the year, and now that seems to have come back off. So that sort of leads us up to the asset allocation discussion. I think we're on the same page in agreeing that one should not adjust their asset allocation too frequently.
When we look at asset allocation, we want to know what the risk is that a client can tolerate. If the risk is moderate, say they have a 50% equity, 50% fixed-income portfolio, well over the long run they should expect a return of 5-6%. Now when we get into volatility of the market, you don't want to start adjusting your asset allocation just because of volatility. You want to look at your long term horizon and see has that changed, am I getting older, do I need to get more conservative? But you need to be careful not to adjust just because the volatility of the market is increasing.
You know, while we're talking about market volatility, I think we're on the same page here in that we would both counsel investors not to change their asset allocation too frequently. But if you think that the stock market may not do so well, what are the pitfalls of saying well, I want to change my asset allocation, I want to have less stocks? It seems logical.
It does seem logical. The problem is that it's very difficult to time the market. When a market does pull back and then starts to turn around, number one you don't know when that's gonna occur and when it does, the market moves very quickly and you can leave a lot of money, a lot of performance, on the table before you get back in the market. So it's very difficult to time the market.
I think that's a good point is market timing strategies require you to be right TWICE, when to get out and when to get back in, and most of us aren't good at that.
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