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
I wrote this message in the first quarter of 2018. And I
believe it remains relevant. Please take time and read it now.
We enjoyed a great return year in 2017, in fact January
2018 looked pretty great. Many of us now
believed 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 89
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 2017 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. We repeat this at the beginning of 2019. 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.