The other day a client asked the perfect question; “How do you protect my money when the market goes down?”. This is an excellent question and the answer is why you pay us to help you succeed in your investment strategy.
Stock market declines are uncomfortable and the last thing most of us want to experience. But inevitably, market ups and downs are part of investing. Investment returns in 2018 feel worse than usual because we tend to compare results to recent history. In this case, 2017 was an extraordinarily unusual year with a market intra-year decline of only -3%. The average intra-year decline of the S&P 500 from last 35 years was approximately -13.8%. In fact, we usually don’t notice intra-year declines. Perhaps the markets are starting to look a little more “normal” according to the long-term historical pattern.
So… how do we protect your money?
ONE: We only invest dollars in volatile assets that match a longer time horizon. Short-term market fluctuations are expected and are the reason these investments have higher expected returns. Again, only long-term goals are funded with volatile investments that have higher expected returns but can behave unpredictably in the short term. The events we are experiencing are a normal part of the stock market and economic cycle.
TWO: We help you stay the course with investments that are volatile when your account balances go down. Historical market evidence demonstrates that trying to time the market ups and downs is downright dangerous. If we agree on an investment plan together, we stand between you and a bad decision. Through our experience and research, we are confident in the long-term investing game plan we have for our clients.
THREE: We recommend clients stop checking account balances during market downturns and turn away from the news. We have created a well thought out financial plan together. We have an investment policy statement (IPS) that highlights these types of events and matches your risk tolerance with your investment portfolio. In addition, we consistently rebalance your portfolio. When stock performance declines (or increases) significantly, your portion of the asset class also declines (or increases). This triggers a “buy” (or “sell”) in order to restore the previously agreed upon asset allocation. In other words, you are buying stocks when they are low and selling them when they are high in order to maintain the proper mix of stocks and bonds in accordance with your goals and time horizon.
FOUR: Finally, we have diversified your portfolio with 8000 plus worldwide companies. If any one company goes bankrupt you probably won’t even notice. Investing in a diversified manner gives you the best chance of avoiding permanent losses in your portfolios. On the other hand, investing in individual companies exposes you to possible permanent losses if a company goes bankrupt. For example; Kodak, GM, American Airlines, Lehman Brothers, Enron, Blockbuster, etc.
But what if you are nearing retirement and don’t have time for long-term goals?
The Takeaway: don’t panic in a bad year.
What is market timing and how can I stop myself from making this mistake?
Watch the following video by economist, and industry icon, Dr. Burton Malkiel.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 12/19/2018 and are subject to change at any time due to the changes in market or economic conditions.