The stock market’s recent ups and downs have caused some to vocally declare the end is near (if not already here) for our most recent bull run. Of course, the market always seems to be on the verge of some new dramatic move if we are to believe the legion of “experts” that litter today’s information superhighway.
What should we do when the road we travel starts feeling bumpy? I offer four principles, one caveat and a few hard questions for your consideration.
- Perspective is powerful. The stock market is volatile. This is a good thing and we should embrace it. This is how markets work, and if we want to maximize long-term returns we must be willing to weather short-term volatility. There can be no long-term growth without the potential for short-term volatility. We love that truth when things are up. We struggle when things are down. Understanding how markets work provides insurance against behaviors that sabotage returns.
- Patience is critical. It is never fun to watch even the best portfolio succumb to the short-term volatility of the market. We have lived through volatile markets in the past, and there is no reason to believe things are different today. The S&P 500 has risen or fallen by at least 1% in a single day over 2,100 times since January 1, 1970 (23% of all trading days during the last 37 years). Understanding that risk and reward are related provides insurance against behaviors that sabotage returns.
- Performance is personal. Acknowledging how much we may emotionally struggle when markets inevitably encounter down periods allows us to structure a portfolio ideally suited to our temperament and then stick with it through thick and thin. Maximizing returns must always be viewed from the perspective of an investor’s individual return objectives and investment comfort zone. This means the best portfolio for you may devote 50% of your savings to a protected lifetime income plan to counter the impact of market volatility. Someone else may be comfortable with all their money invested in a beautifully diversified, low cost 100% stock portfolio. An investor who sleeps well at night will not sabotage their returns.
- Portfolios promote peacefulness. A properly designed portfolio is diversified to provide comprehensive asset class allocation and global market exposure. Simply put, we want to own the right types of stocks and/or bonds throughout the markets of the world. Understanding the importance of diversification provides insurance against individual stock risks that sabotage returns.
And the caveat is…all portfolios are not created equal. A beautifully diversified, low cost portfolio is not five “really good stocks” in five different market sectors (sorry Jim Cramer). It is not thirty “really great companies with high dividends”. It is not a collection of 5-Star mutual funds stitched together because of their performance over the past several years or the ten mutual funds Money magazine says you must own if you’re going to prosper in 2015.
Yes, markets are risky. Yes, we may be poised for a market correction. And yes, you may not like the ride once the trail winds its way down during the next, inevitable market decline.
Perhaps now, more than ever, it is time to ask yourself a few hard questions.
Is your portfolio structured to take advantage of the long-term benefits historically found in certain asset classes (i.e. small versus large stocks, value versus growth stocks)?
Are your retirement savings managed to avoid the high fees and poor track record of stock pickers and market timers?
Are you globally diversified to capture global returns and manage the risk potential of any single market swinging violently in the short-term?
Do you have a lifetime income plan that delivers prosperity and peace-of-mind throughout your retirement?
Your perspective, and your answers to a few tough questions, could make all the difference in your pursuit of peaceful wealth.
This material is intended for educational purposes only and is not intended to serve as the basis for any investment or purchasing decisions.