31 Dec A Toast to Market Volatility

As a tumultuous year in global financial markets winds toward a close, it is interesting to reflect upon the opportunities produced by the disparate performance among asset classes and the volatility wrought by fear and uncertainty.

It is always pleasing to watch asset prices rise in a sanguine manner.  However, in the long term, like personal growth itself, the greatest advances arise from adversity and not from the comfort of good fortune.  We must endure the irritation of falling prices if we are to reap the longer-term benefits derived from the continuous practice of shedding excess profits from one asset so as to partake in the bargain pricing of another.

Thus, the rise in U.S. and simultaneous decline in international equities over the second half of the year has provided opportunity through continuous rebalancing to take profits here while scooping up bargains abroad.  Likewise, attractive bargains have sprung up in the last several weeks in high-yield domestic and more particularly in emerging market bonds — where lower prices today translate into higher income flows into the future.

Diversification among both winners and losers in the short term, and rebalancing throughout the year to maintain targeted asset allocations, moderates market and portfolio volatility and creates opportunity for enhanced long-term performance.

The importance of viewing declining prices in some asset classes as opportunities rather than setbacks cannot be overstated.  To this can attest anyone who, through disciplined rebalancing, continued to buy into and through the 2008 stock market collapse.  By withstanding the discomfort of substantial short-term portfolio shrinkage — during that once-in-a-lifetime opportunity to reap bargains of historic proportion, they earned premium performance throughout the subsequent rally.

Our eyes must not linger long upon the recent rise in the DOW, but continue to search for bargains among those investments we now may acquire cheaply with proceeds from realized US stock market gains – an eye toward the distant objective rather than the already tread ground under foot.