Hope and Luck Are Not Successful Investment Approaches

May 25, 2017

We get it; when markets are turbulent, particularly when stocks fall unexpectedly, resisting the urge to start looking for reasons to bail out of the market can be a tall order. Yet the future is inherently uncertain; there are no guarantees in life or when it comes to investing. Anything can happen.

If you have a sound investment process though, these are the times when you really need to stick with it, remaining disciplined and consistent in executing it. Otherwise, you will be at the whim of both your emotions and the market’s random moves. It’s possible to get lucky once or twice by exiting the market right before a big drop or jumping in just before an extended rally. But hope and luck are neither sustainable nor successful investment approaches.

One of the few truisms about investing is that stocks will go up and they will go down. As fellow asset manager Ben Carlson pointed out in a recent blog post, a review of the stock market declines of the S&P 500 for each calendar year going back to 1950 shows stocks fell at some point in every year. The median drop during the 67-year period from 1950–2016 was 10.5%. The average was 13.5%. A “bear market” for stocks is defined as a drop of at least 20%, but shorter-term falls up to and including 25%–50% have not been uncommon. They are very likely to happen again. No one who invests in stocks should think otherwise.

 

In light of that, it is helpful to distinguish broad stock market performance from overall investment portfolio performance. Except for our all-equity portfolios, which are fully invested in stocks, all our portfolios contain some bonds and other lower-risk fixed-income as well as alternative investments in addition to their stock allocations. They are also diversified across stock categories, including large- and small-cap U.S., developed international, and emerging-market stocks. Our goal is to create resilient portfolios that maximize long-term returns while minimizing downside risk.

That said, if the magnitude of the stock market dips mentioned above would cause you extreme discomfort, then you may want to reconsider what level of risk you are willing to accept in your overall portfolio. Your Litman Gregory Wealth Advisor can help you think about and weigh potential scenarios related to your investment portfolio, ensuring that your risk tolerance level aligns with your long-term objectives, both in terms of investment returns andoverall life goals.

Do you have more questions about financial market performance or want to discuss your portfolio? Please call your Litman Gregory Wealth Advisor or contact us here.

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