We have often said that the keys necessary to achieving successful investment results start with a written customized plan designed to achieve our specific, most important lifetime goals. With the plan in place, we must then have the patience, the discipline, and the willingness to give it time to work.   Markets unfold on their own time frame so it is important to be patient as our plans play out; we must be disciplined to continue with our strategies – particularly resisting the impulse to change during the inevitable periods when they are underperforming other “hot” approaches; and, give it the time it needs so that our long-term goals have the opportunity to benefit from the inevitable long-term appreciation of the markets.

After the wonderfully gentle 2017 markets, this year has been more challenging.  As you may recall, the year began meteorically with the market soaring out of the gate to new all time highs up until right before the end of January.  Then, the long overdue volatility and correction finally hit with a decline into February of over 10% in many of the averages.  Since then markets just seem to bounce up and down not really getting too far in either direction with volatility tamping down again.  Furthermore, the strong dollar (and all the trade war talk and actions) have weighed on the international investments.  Thus, diversifying away from sole focus on U.S. equities has also held back gains.

The gist of it all is that, depending on your strategies, returns this year may have only been flat to slightly positive.  This has been a bit frustrating, but I believe that this feeling of frustration critically needs to be met with the discipline of staying the course and not performance chasing.

On the other side of frustration, there might be a bit of complacency settling back in with the volatility of both stocks and bonds falling to low levels again.  There are many reasons to prepare for the likelihood of some more big market moves in the not too-distant future.  To mention just a few:

Economic

• With the economy at full employment, inflation has kicked up to the ~2% level that the Federal Reserve has been targeting.  Will wage pressures push inflation up further so that the Fed decides to accelerate the pace of interest rate hikes to keep inflation under control?
• Worldwide liquidity growth has slowed and may be about to reverse.  Markets have certainly thrived on the unprecedented liquidity since the financial crisis as central banks pushed rates to zero (and below).  Can the markets and the economy “stand on their own” without the extraordinary measures remaining in place?
• How will the current trade tensions (particularly with China) play out?  Will the threat of a trade war morph into a real trade war which would likely hurt economic growth while spurring inflation?  Or, might this brinkmanship end with positive agreements that facilitate freer trade?

Geopolitical / Political / Seasonal

• Midterm elections are fast approaching.  This creates a great deal of uncertainty with the potential to dramatically impact President Trump’s agenda and even possibly his hold on the presidency.  Historically, the second year of a president’s term has been the weakest for markets.
• The calendar has turned a page to August.  Some of the markets’ biggest moves have occurred in the August – October period – both up and down.  Will we see that again this year?
• International relations continue evolving – Brexit, Italian banking, escalating Iranian tensions, possible continued de-escalation (or maybe re-escalation) of tension with North Korea, and, of course, ongoing issues with Russia both meddling in our elections and acting in various hotspots around the world where we also have interests.

When I speak of “preparing for volatility”, I’m really thinking of two primary ways to prepare:

1. Make sure that your strategy is still being rigorously followed.  It is important to follow your plan – if your goals haven’t changed, your strategy shouldn’t either.
2. Anticipate the swings so as not to overreact emotionally and make ill-fated decisions in the heat of things.  Remember that even the sharp selloff in February was quite tame by historical standards.  Our markets (S&P 500) have averaged one 14% decline per year (with bigger corrections in midterm election years).  Furthermore, this is a very long-running bull market and a 20% (or greater) decline is arguably long overdue.

So as not to be accused again of being a “Debbie Downer”, I want to be clear that increased volatility may in fact kick in either direction.  We just want to be prepared.