As investors we know or should know that the reason stocks have historically returned more than fixed income over the long-term is because stock holders endure the volatility of the market. Without the volatility that goes hand-in-hand with stock ownership, the risk premiums associated with stocks would diminish, and so would the attendant wealth. Mark Matson
We have enjoyed a great return year in 2013. Many of us now believe that the markets will continue going up. Of course there are always those predicting impending doom.
As an investor coach now is the time that I really earn my fees. Each week I discuss building a prudent portfolio at a risk level that YOU are comfortable with. We discuss that we need to know the expected return and the expected volatility. This information will give us the tools to build the right balance of return and risk.
However I also mention the most difficult task of an investor coach is keeping clients from making emotional decisions. The task sounds easy, remain disciplined. However when we are bombarded with dire predictions of doom many cannot resist panicking and selling when markets correct.
This in fact is a great opportunity to buy at a discount price. I believe Warren Buffet said it best when he told of his investment philosophy ‘when they’re crying I’m buying when they’re yelling I’m selling.’
Some historical statistics might help with this. Since 1928 the S&P 500 has returned 9.8% on average. During this time there has been 87 drops of 10% or more compared to 23 drops of 20% or more.
Since 1946 it has taken the market 111 days on average to rise to its pre-crash levels. Of course we must add that past performance is no indication of future results. However, I believe that since we have over six decades and more, of data we can assume that after all market downturns, regardless of how severe, the markets recover and go on to greater heights.
Now is not the time to panic and sell and seek safety, now is the time to implement one of our three simple rules which is rebalance.
At the end of 2013 when the equity markets flourished and fixed income lagged, we sold equities back to our original allocation and bought fixed income to our goal allocation. Buy low and sell high. We will again rebalance at the scheduled time. If the down turn continues we will sell fixed income and buy equities. Again buy low and sell high. When we have a prudent process and the discipline to follow it we will succeed long term.
This is where the services of an investor coach become invaluable. Because with the right process and discipline you will reach your long term financial goals.