Stay On Track
April 25, 2022
For investors, it’s never easy to go through market corrections. The old saying, “the market takes the elevator down and the stairs up”, summarizes how sudden the stock market can head lower during corrections. Even though the market has rebounded (and many times very quickly) from every downturn, the “feeling” that the market will keep going down seems to persist in our minds. It’s best to think of market downturns as speed bumps on a long inclined road. Since 1980, the stock market has averaged intra-year declines of -14%, BUT, the annualized return over that time period was 11.9%. This is why equities are long-term investments that should be viewed over 4 to 5 rolling year periods.
Below are three ways to help you stay on track:
Make sure your allocation is aligned with your needs and risk tolerance. We all know that over time equities outperform bonds, and bonds outperform cash. However, the one way to guarantee that you underperform and get off track is selling when the market goes down. Having the right mix of equities and fixed-income lowers the volatility and risk in your portfolio, which in return, keeps you from steering off the road when the road becomes bumpy. The proper allocation will smooth out the road and help you stay on track.
Ignore the noise. As Warren Buffett has said many times, the daily chatter in the financial news is simply short-term noise that should be ignored. Our clients have long-term objectives that should not be interrupted by the daily “opinions and guesses” heard on cable TV. Over the course of just a few hours you can hear, “this is the greatest buying opportunity of all time”, or, “sell everything, the market is heading a lot lower”. Ignore the noise, stay focused on the long-term plan.
Prepare your portfolio. Over the next year or two, we will see higher interest rates. Inflation will be a thorn in the side of the consumer for a while as well. In a properly allocated portfolio, you want to make sure that you’re well diversified within your equity allocation. Having different asset classes lowers risk. Equities have long been a way to fight inflation. In five of the last six rate hike cycles, the stock market has seen positive returns. Regarding fixed-income, keep your duration short so you can take advantage of higher interest rates down the road. Adding floating rate and inflation protected holdings may be beneficial as well. Also, ignore the pundits or articles that say “bonds are bad”. They are usually talking about long-term treasuries, in which case, we would agree. Putting a blanket over all bonds is disingenuous. Lastly and very important, when the market shifts you away from your set allocation, rebalance your portfolio back to your target allocation. Many investors incorrectly think that if they are fully invested, they can’t take advantage of market downturns. This is not true as you can rebalance your portfolio to take advantage of downturns and uptrends. Having the proper allocation, ignoring the noise, and preparing your portfolio are all necessary in helping you stay on track.