During periods of extreme volatility in the stock market it is not unusual for investors to abandon their long-term plan and make adjustments based on emotion. Often times these changes are made at the worst possible time…people looking to buy stocks as the market is surging to new highs or selling after the market has had a dramatic pull back, essentially buying high and selling low.
Our advice to investors is to create a long-term financial plan that fits your risk tolerance and time horizon and stick with it through both up and down markets.
The core piece of portfolio management is to make sure that you own stocks and bonds in high quality companies that can withstand a severe decline in economic activity and will be able to recover during better times. Companies with a solid balance sheet, strong management, with industry leading products that make money are the cornerstone of a solid portfolio. Of course, the stocks of these companies are not immune to price declines, but the chances of these types of companies going out of business during a recession are lower than companies that have a lot of debt and haven’t proven that their business model holds up in both good times and periods of financial stress.
The second part of the plan is to stick with it. If you are confident in your portfolio’s holdings, then you should be able to ride through the ups and downs without having to make drastic decisions based on daily market moves. The investor that moves in and out of the market has two decisions to make; when to get out and when to get back in. Generally, the getting out decision is made during the maximum pain in the market. To make things worse, investors wait until some sort of “all clear” to get back into the market. Missing just the few best up days in the market over the course of a year can have a drastically negative impact on your long-term returns. Looking at this year’s sell off in the market, low of the market was on March 23. From that date through May 26 the market is up 37%. During the first 10 trading days since March 23 the S&P 500 had a +9%, 7% and 6% day. Missing any one of these days will have a lasting negative impact on a portfolio.
It is impossible to determine where the market will go in the short-term, so keeping a long-time horizon is the best strategy. The table below shows the average yearly returns in the S&P 500 following bear markets going back to 1961. The 1, 5, and 10 year returns are all well above the long-term average returns.
At Chatham Wealth Management, we create financial plans for clients based on their individual situation and goals and construct strong portfolios to help achieve those goals. Helping clients to stay invested and not make emotional decisions is just one of the benefits of working with an experienced advisory firm like Chatham Wealth.
Brian McGeough, CFP®