The changing timetable for the Fed’s “tapering back” of monetary support has thrown the markets into turmoil. Bonds suffered big losses in May, and both stocks and bonds have had a dismal June, with 100+ point swings becoming the daily norm.
What’s an investor to do?
Don’t let short-term volatility force you off your long-term path. Advisor Bruce Brugler of the Presidio Group in San Francisco offers this example:
“For an investor with an intermediate time frame there’s compelling evidence that shows volatility doesn’t matter that much. To illustrate this we looked at a model of what would have happened over the last 50 years to a hypothetical investor with terrible timing. We looked at the nine times in the last 50 years where there were really terrible equity markets, including the most recent crash in 2008.
Then we asked: If someone invested at the peak of these markets right before the markets tanked, left their portfolio untouched for five years and came back, what percent of the time would that portfolio have actually made money? The answer is the investor would still have had a positive return in their portfolio every single time, despite investing before the markets bottomed out — as long they stayed in for five years. In some cases the return was startlingly positive.“
The worst thing you can do is panic and sell investments just because they are down. Stick to your long-term plan. Think of it as a cross-country roadmap designed to keep you on course.
Accept that in even the best-designed portfolio, some assets will have losing months. Sometimes that may be true for stocks; sometimes it may be true for bonds. That’s absolutely normal. It doesn’t mean those assets don’t deserve a place in your portfolio, or aren’t “working.” Just like with the weather, you can’t realistically expect sunny skies every day. Investments are in your portfolio for specific reasons. In the case of bonds, they offer a steady income stream, lower risk, and relative stability. Give investments time to work, and don’t bail just because you encounter a few rough months.
Keep an open mind, and be willing to adapt. We recently canvassed all our more conservative clients whose portfolios have lots of bonds, and few stocks. We know they want to keep risk levels as low as possible, but we nonetheless asked them to consider how changing times might call for changes in their portfolio mix.
Investors need to be true to themselves, but portfolios also need to bend and adapt to take advantage of changing investment conditions. The portfolio mix that worked for you five or ten years ago might need a tune-up to help you meet your goals today.
Here’s a few examples. With today’s super low interest rates, bond investors can’t get the income they need if they stick to just money markets, CDs, and government bonds. That may have worked before, but it won’t work now. Retirees probably won’t be able to keep up with the rising cost of living going forward unless they include some dividend-paying stocks in their portfolio. And that go-go portfolio that wowed you when you were working might be a little reckless now that you’re retired and taking money out monthly.
The Takeaway: Investors may be facing rougher times ahead. Don’t obsess with the markets, and whether you’re up or down for the day, but focus on whether your portfolio is designed to get you where you need to go five or ten years down the road.