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Don’t let fear drive your investment strategy

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Almost a decade has passed since the great recession of 2008. Like any anniversary, this 10-year mark is providing the media an opportunity to take stock of the markets’ strength and vulnerabilities since that event. The questions seem to focus on whether the growing economy is a good thing or whether complacency and a roll-back of regulations could prompt another downturn. And in fact, many institutional investors have started to de-risk their portfolios by deleveraging, increasing credit quality and reducing high yield and international exposures.

Almost a decade has passed since the great recession of 2008. Like any anniversary, this 10-year mark is providing the media an opportunity to take stock of the markets’ strength and vulnerabilities since that event. The questions seem to focus on whether the growing economy is a good thing or whether complacency and a roll-back of regulations could prompt another downturn. And in fact, many institutional investors have started to de-risk their portfolios by deleveraging, increasing credit quality and reducing high yield and international exposures.

 But for the regular investor, while it’s important to stay informed, these opinion pieces should not be cause to fear the markets. In my 25-plus years of working in wealth management, I’ve noticed that a client sometimes will become spooked by an economic event and may either want to sell low and buy high later, or even worse, may question their entire investment and retirement planning strategy.

I’ve also seen clients who are so afraid of being too involved in the markets that they want to avoid it altogether. People with this worry are often superb savers, but their aversion to investing in equities may hurt them in the long run. Let’s examine further the downside of these two kinds of fears.

Impulsive investment decisions can carry a cost. People who jump in and out of investment sectors or classes tend to pay a price for it. A statistic hints at how much: Across the 20 years ending on Dec. 31, 2015, the S&P 500 returned an average of 8.91 percent per year, but the average equity investor’s portfolio returned just 4.67 percent annually. Fixed-income investors also failed to beat a key benchmark: In this same period, the Barclays Aggregate Bond Index advanced an average of 5.34 percent a year, but the average fixed-income investor realized an annual return of only 0.51 percent.

This data was compiled by Dalbar, a highly respected investment research firm, which has studied the behavior of individual investors since the mid-1980s. The numbers partly reflect the behavior of the typical individual investor who loses patience and tries to time the market. A hypothetical “average” investor who merely bought and held, with an equity or fixed-income portfolio merely copying the components of the above benchmarks, would have been better off across those 20 years. In monetary terms, the sustained difference in performance could have meant a difference of hundreds of thousands of dollars in earnings for an investor across a lifetime, given compounding.

 

People afraid of investing also pay a cost for their anxiety. They often become great savers, steadily building six-figure cash positions in enormous savings or checking accounts – but they never sufficiently invest their money.

That fear comes with a severe potential downside. Just how much interest are their deposit accounts earning? Right now, almost nothing. If they invested their savings in equities or some kind of investment vehicle with the potential to outrun inflation, their dollars could grow and compound over time to a degree that idle cash does not.

A large emergency fund is a great thing to have, but it can be argued that a tax-advantaged retirement fund of invested dollars is a better thing to have. After all, who retires on cash savings alone? Tomorrow’s retirees may live mainly on the earnings generated from the investment of the dollars they have saved over the decades. Seen one way, a focus on cash is financially nearsighted; it ignores the possibility that even greater abundance may be realized through its sustained investment.

According to a recent article in AARP Bulletin2, good investing should oscillate between being dull and painful. Dull because once you set up a good portfolio strategy, you should let it alone. Painful because you often need to take a tolerable risk to grow your investments and when a scary market trend does occur, you often need the discipline to resist that urge to change.

 

Now is a good time to evaluate your investment strategy with an advisor. For investors who ask us about the current 10-year anniversary of the recession, we remind them that market corrections are part of the investment environment, and volatility can present opportunities for longer-term investors. We also remind them that if they can’t handle a 10 or 20 percent market decline, they should evaluate how much of their portfolio is exposed to the stock market.

Now is a good time to meet with a financial adviser to discuss your goals and overall life objectives. It’s also good to have quarterly or twice-a-year meetings to review portfolio goals given any life changes. 

The most important thing is to keep a long-term orientation. Trying to figure out what the market’s going to do today or even next week is an impossible task and one that I don’t think is helpful to creating long-term wealth.

William Winters is a senior vice president and managing director of Tompkins Financial Advisors. He can be reached at bwinters@tompkinsfinancial.com or (914) 946-1277.

Disclosures: Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates. LPL Financial is a separate entity from Tompkins Financial Advisors. The investment products sold through LPL Financial are not insured Tompkins Trust Company deposits and are not FDIC insured. These products are not obligations of Tompkins Trust Company and are not endorsed, recommended or guaranteed by Tompkins Trust Company or any government agency. The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including loss of principal. No strategy assures success or protects against loss.

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