The Reality of Red Numbers

The Reality of Red Numbers

9 years ago 0 0 1437

How often are monthly stock market returns negative? Is there a pattern within years or across years? How about the bond market? You may notice that short-term volatility is a fair price to pay… the longer the time period, the fewer the negative returns. In other words participation and patience pays. And, remember that inflation (i.e. purchasing power risk) is a bigger long-term risk than market volatility. Gain perspective from…

Doctrine of the Mean

10 years ago 0 0 1350

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?

10 years ago 0 0 1220

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

10 years ago 0 0 1281

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.

Reality of Red Numbers (S&P 500) WealthStep Version_Page_1

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.

 

Quarterly Thoughts – Q1 2014

11 years ago 0 0 1246

Are there clear patterns of investment market returns over time?  How does a “balanced” portfolio compare to individual asset classes over time?  Our chart entitled “The Periodic Table of Investment Returns – A Case for Diversification Amid Uncertainty” is a colorful illustration that addresses these questions.

People are not naturally wired for investing.  Without discipline, it is human nature to make mental errors, often due to “recency bias” and the “flight” reflex.  Recency bias is the tendency for people to believe that the future will be like the present.  For example, if stocks are hot, the average investor often ignores risk and increases equity holdings.  Then, when a market correction occurs, those that increased their holdings in stocks (i.e. risk) increase their chance of a flight or panic reflex.  The result is often economic damage caused by emotional “buy-high, sell-low” investing.

Rational asset allocation across many styles, and the discipline to re-balance to your asset allocation, is the key to long-term success. A diversified portfolio approach will combine many or all of these and other asset classes (as appropriate for your specific goals) to reduce price fluctuation risk, or “volatility,” and provide a more predictable and smoother financial journey.

Quarterly Thoughts – Q4 2013

11 years ago 0 0 1215

Will a disciplined investment process improve your health?  Recent research says yes.  Stress caused by dramatic market movements, the financial press, and investors’ common behavioral mistakes can make people feel queasy… or worse. A March 2013 study by the University of California at San Diego found that hospitalizations rise on days when stock market prices fall. Another study published in the American Journal of Cardiology showed a significant correlation between a period of stock-market decrease and rates of heart attacks.

By helping clients develop and staying focused on their goals, and applying a prudent process, our clients are better able to separate emotions from short-term market movements. The result is greater peace of mind, and possibly health.