May 5, 2022
News headlines described the April returns of the S&P 500 as “the worst April returns in 30 years.” Although that may be correct, in the past 30 years, we have seen months with greater declines greater than April 2022. And let’s not forget that over the past 30 years the S&P 500 has returned over 1700% and $10,000 would have grown to over $185,000.¹
If I was invested 100% in the S&P 500, my portfolio would have dropped just about 9% in April. But my portfolio and our clients portfolios are not invested 100% in the S&P 500. At Prato Capital, our client’s portfolios (mine included) are a balanced and diversified mix of stocks and bonds. Balanced meaning that our clients are not 100% invested in stocks. The bond portion of the portfolio provides a balance to the volatility the stock market sometimes sees. Diversified means that the stock portion of the portfolio is not all in the S&P 500. It includes small and mid- cap stocks, and international and emerging market stocks. So, although my portfolio declined in April, it was not near as much as the S&P 500 decline.
For me, what matters much more than the short term monthly and even quarterly S&P 500 returns is any impact on my financial plan over the rest of my life as I approach retirement. The same should be true for everyone with a plan. Short-term stock market results make good headlines, but every long-term investor should be looking at the impact of these returns over their entire lifetime.
Just as we plan on the growth of stocks over the long-term to help grow portfolios to support the financial plan over the years, we also expect and plan for market declines to happen. It is built into every financial plan we offer to our clients. And the overall impact of April’s returns on my Financial Life Plan was at most very minimal because declines are expected.
Volatility Continues into May
Just this week alone, we have seen the NASDAQ gain and lose up to 5% in one day, along with 3% swings of the S&P 500. That should be the definition of volatility.
What does this mean for the stock market returns for the rest of the year? Really, nobody knows but many will get in front of the cameras and microphones to give their best guess. It is important to remember most who are predicting a bear market have done so many times over the past few years. And those predicting that stocks will rally have probably done that before too. Predictions of the future should be treated as noise, and we recommend it should be tuned out.
When we use history as a guide, we have seen months in a year with positive returns only to have negative returns at the end of the year, 2018 is the latest example. And we remember 2020 with the large decline in March and the year ending with positive returns overall. One or two months do not equal annual or long-term returns.
We expect stocks to decline sometimes. In fact, it is healthy for the stock market over the long- term to sometimes see declines like we saw in April. We have seen declines in the past and we will see declines in the future. To lessen the impact of these declines, we use a balanced and diversified portfolio that can also capture the gains when they do happen.
For myself and our clients, the most important issue with any stock market decline, or stock market increase for that matter, is the potential impact on their financial life plan. Having a targeted asset allocation and rebalancing in both up and down markets is all part of the plan.
For any concerns about the market volatility we have seen or any concern about your financial plan, please call or contact us.
Gregory, Gabriella, Brian, Samer and Chris
Prato Capital: Where Integrity Meets Discipline
¹ Data from YCharts. S&P 500 returns include reinvestment of dividends. Monthly declines greater than 4/2022: 8/1998, 2/2001, 9/2002, 9/2008, 10/2008, 2/2009, 12/2018, 3/2020.