Simple or Simplistic? Which gets you to financial independence?
Doctrine of the Mean
When one asset class is outperforming another within a diversified portfolio, investors sometimes wonder why both are held. The recent US stock market vs. the weaker International market such an example. The non-US stock market’s (MSCI EAFE) 3-year annualized return was not far off long-term stock averages, but the US market’s (S&P 500) unusually high 3-year return of 17.9% made well-balanced investors envious of less diversified portfolios. During the financial…
Will a Stock Market Correction Derail your Goal?
Corrections are more normal than often thought and should be inconsequential. Bear markets, which are periods of more significant decline, should be surmountable if you have planned properly.
Stock market “corrections,” defined as drops of 10% or more, are not more likely at the top of a market. Between the years 1900-2013, the Dow (DJIA) stock index dropped 10% or more about once a year. Stocks do not maintain steady value, but they are great tools for avoiding the bigger risks of inflation and longevity risk (running out of money), which are generally far more goal-damaging.
Why do corrections happen? The market “corrects” itself to more appropriate levels, as economic conditions and investor risk appetites change. Such adjustments can be a healthy way to reduce investor complacency and keep excessive risk-taking in check, thereby reducing the chance of bigger drops.
If you are worried about a correction, should you reduce your allocation to stocks? Market timing is an unpredictable approach at best, and reducing stock exposure reduces your long-term return, which can jeopardize your goals. The right time to reduce risk is when your return requirements are lower… i.e. when your time horizon has decreased or you have more assets than needed to achieve your goals.
The Reality of Red Numbers
What’s your guess as to how many months the stock market declines or rises each year? And in bad vs. good markets? Our yearly update of “The Reality of Red Numbers” shows you, and illustrates that market volatility is often a reasonable price to pay as part of a diversified portfolio, to help capture long-term positive returns… whereas inflation (purchasing power risk) is often a more harmful risk in the long-run.
S&P 500 Index returns provided by third party sources believed to be reliable. Past performance is not a guarantee of future results.
Illustrations are intended as general information, and are not specific investment advice. The S&P 500 index represents just one of many investment markets that an efficient, diversified portfolio should consider.