If you are standing in the doorway trying to protect yourself as the sky (i.e. stock market) falls, then consider these ideas to help you remain calm.
1. Keep your long-term goals in mind: Remember that you have an investment strategy that is in-line with your goals, time horizon and risk tolerance. (If you have not thought through these issues, then maybe it is time to do so). Don’t let daily market movements and your emotions dictate your approach by making rash investment decisions. Focus on sticking with your strategy and consider minor adjustments where appropriate to maintain a diversified portfolio.
Despite short-term volatility, stocks have outperformed bonds over the long haul. Here is the growth of a hypothetical $10,000 investment over 30 years:
Source: SPAR FactSet Research Systems.
2. Moving to cash might not help: In a down market moving to cash may appear to provide relief. However, how do you call a market bottom? If you stay in cash too long you may very well miss the turn around in stock market performance.
Return on Cash vs. All-Stock Portfolio and a Diversified Portfolio
Source: Strategic Advisors, Inc.Hypothetical value of assets held in untaxed accounts of $100,000 in an all cash portfolio; a diversified growth portfolio of 49% U.S. stocks, 21% international stocks, 25% bonds, and 5% short-term investments; and all stock-portfolio of 70% U.S. stocks and 30% international stocks.
3. Bear markets have not stopped equities: The U.S. stock market has rebounded from 15 corrections since 1975 through August 2015 and now we have another 10% decline here in early 2016. The volatility exists and market declines can and do occur, but this will be followed by a recovery at some point. We expect this current volatility to be no exception to the long-term trend shown in the chart below. There is light at the end of the tunnel!
Price performance of the S&P 500 index, August 31, 1975 – August 28, 2015, with percentages in shaded areas representing declines from previous peaks
Source: S&P Dow Jones Indices. A correction represents an index decline of 10% (approximate in 2012).
4. Investing in various asset classes improves probability of success: It is very hard to predict which assets classes will outperform. Therefore, asset class diversification helps to reduce risk, while improving overall portfolio returns over time. Investing in a single asset class or equity style may lead to major losses in certain years compared to a diversified portfolios.
Ranked Annual Total Returns of Key Indices (2005-2015)
Source: Informa Investment Solutions; Diversified Portfolio is composed of 35% of the Barclays US Aggregate Bond Index, 10% of the MSCI EAFE Index, 10% of the Russell 2000 Index, 22.5% of the Russell 1000 Growth Index and 22.5% of the Russell 1000 Value Index.
5. Avoid marketing timing: Marketing timing puts investors at risk of missing days when the market is rallying upward sharply. Missing the 10 best market days can drastically reduce long-term returns. In this scenario, average annual returns drop to 5.5% per year down from 9.2% per year. Market timers have the potential to miss out on ever-crucial market recoveries.
Take a deep breath and keep your composure before you pull the trigger on any dramatic changes to your investments or financial plan. Reach out to your trusted advisors for guidance and coaching to ensure you are on target to meet your goals.