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. For example, $10,000 invested in the S&P 500 in 1985 would be worth $250,993 as of year-end 2014.
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. Although cash yielded 1.6% during 2008, while market was in free-fall, the U.S. stock market then went on to a 162% gain over the next five years.
A move to cash would have cost you around 160% of upside!
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!
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. For example, in 2010 Small Cap Stocks was the top performing asset class gaining 26.9%, however the following year Small Caps returned -4.2%, while Fixed Income return 7.8%. If you had an appropriately sized allocation to Fixed Income in 2011 you would have mitigated some of the downside risk experience in Small Cap Stocks. In short, don’t put all your eggs in one basket.
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.
For more information please visit us on the web at Chathamwealth.com, call us at (800) 472-8086, or send us an email at info@Chathamwealth.com. We offer free portfolio reviews. Please contact us to make an appointment. You can also view our videos at http://www.chathamwealth.com/cwm-team/