Wars bring uncertainty, but markets have a long history of overcoming conflict. Sadly, fighting in the Middle East has been nearly constant in modern market history. After initial volatility fades as the shock wears off, markets are forward-looking and quickly assess the likelihood of global economic impact. Fortunately, efficient markets reflect widely known information, so it is best not to make investment decisions on today’s headlines. After all, markets have seen it all before, from war to pandemics to economic recessions. Therefore, as long-term investors, we must remain calm and focus on long-term goals. History has shown us that stocks have a high probability of overcoming regional strife quickly.
Downside market volatility is one of the toughest things investors must endure. But market volatility is a fact of life for equity investors. October marked the third consecutive month of declines for markets this year. Interest rates and inflation continue to weigh on the market, as well as the unexpected eruption of violence in Israel. Stocks can fluctuate for any reason or no reason at all, particularly over short time periods. But from our perspective, volatility can be positive and negative, and we remind clients that stocks can move up as quickly as they move down.
The critical takeaway is that higher or lower volatility is never permanent. When volatility increases, understandably, investors can be tempted to deviate from long-term plans and seek refuge from the storm – until things calm down. However, history shows that successfully and repeatedly timing the market exit and re-entry points is impossible and runs the greater risk of missing the good volatility when stocks bounce.
While selling stocks when volatility is high may provide emotional relief, it may result in falling behind on your long-term financial goals. Multiple studies show that if an investor is out of the market for as little as ten days over a 30-year period, it can result in investment returns that are cut in half. Many of those best days occur in the scariest of times. As Warren Buffett likes to say, time in the market matters a lot more than timing the market. Being a stock investor is learning to be comfortable with volatility.
At Cardinal Capital, our strategy is to invest in financially strong, profitable, growing companies. Our methodology is to build well-diversified portfolios of these companies, purchasing shares of individual companies when they are demonstrably cheap compared to normal valuation levels and selling when they are rich. Our bond strategy is to invest in investment-grade short to intermediate-term bonds to provide stability of principal, cash flow, and diversification. Utilizing low-risk bonds, along with our equity portfolios which exhibit significantly lower volatility than the broader market, allows a higher allocation to equities for the superior returns they provide over the long term.
Finally, from our experience, one of the best ways to get comfortable with uncertainty and volatility is to maintain a long-term perspective and have a plan. We believe investing in a diversified portfolio of financially strong, growing companies with high returns on invested capital will continue to be the better path for protecting and growing wealth. While we may not know with certainty what lies ahead, we can say from experience that patience and discipline reward investors with a long-term perspective.
We will continue to monitor the markets closely and adjust our portfolios as needed. We appreciate your continued trust and support.
