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Thoughts on volatility

Often staying the planned course is the most difficult part of investing. This held true in the first quarter of 2018 as volatility increased and stocks diverged from their steady climb of 2017. What started off as the strongest start to global equities in at least 30 years ended up being an up & down three months that marked the first negative quarter on the S&P 500 since the third quarter of 2015. The SPDR S&P 500 ETF (ticker: SPY) ended the quarter down -0.78%. Global stocks as measured by the iShares All Country World Index ETF (ticker: ACWI) was down -1.00%. After it was all said and done, losses were not severe. However, a spike in volatility has an impact on our emotions and a tendency to make it feel far worse.

Over the last nine years, passive investors have done reasonably well by owning broad market exposure through index-tracking mutual funds and exchange-traded funds. The rising tide certainly helped to lift all boats. However, as experienced in February and March, as volatility increases a successful investing experience becomes challenging. Remember, owning an index fund is an active decision to ignore valuation and risk differences in businesses. I believe these factors will be critical in the medium term as the low hanging fruit has been picked through.

In summary, we feel the chances of long-term success in the markets is increased by two things; creating a game plan that fits your tolerance for losses & staying the planned course. A critical mistake in portfolio management is selling your positions after a market sell-off; prior to a potential recovery in price. The chance of this ‘selling at the bottom’ is reduced if the portfolio’s downside exposure is within your comfort zone. Secondly, if you have a solid game plan that fits your goals and comfort zone, stay the course! Like the tides, markets have their ebb and flow. This is the nature of a risk asset. There will be assessments and checks along the way. Perhaps adjustments and repositioning. However, do not abandon ship at the first sign of foul weather. Remember, getting out before a market downturn is half of the decision; when to reenter the markets before a recovery in prices is just as important and difficult to execute.

Cory Michael Nakamura, CFA, CFP

Mosaic Pacific Investment Advisors

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