Recent Musings

1. When building a portfolio, you basically have two choices.

With the availability of index funds, it’s not difficult to build a portfolio. The question is, what kind of portfolio do you want to build? Or, to put it another way, what are you trying to accomplish?

Do you want to trail the market when it’s going up or when it’s going down?

You can structure your portfolio to be more aggressive than the overall stock market. That will help you when the market is going up but hurt you in down markets. Alternatively, you can structure things to be more conservative than the market, in which case you’ll trail in up markets but lose less when the market is going down. The takeaway being you can’t have it both ways.

Investment returns (in the realm of normal) are within our control. Many people worry about the stock market. It doesn’t need to be that way. If you don’t want to lose sleep worrying about the market, you don’t have to. It’s all about the asset allocation choices you make.

2. When it comes to investments, there’s no such thing as perfect.

No investment is going to be perfect, and we shouldn’t expect it to be. In traditional finance textbooks, investment decisions are presented as a tradeoff between risk and return. If you want more return, you must take more risk. But if you want less risk, you must be content with lower returns.

That is a bit over-simplistic so when evaluating investments, investors should think things through much more carefully. In addition to risk and return, consider an investment’s fees, complexity, liquidity, tax treatment and the overall level of economic certainty or uncertainty.

3. When warranted, be willing to pay more.

It’s worth paying more if you’re getting extra value. Most investors are sensitive to fees and taxes—and they should be—but this comment is a good reminder not to take this too far.

Similarly, if you own an overpriced, underperforming fund, should you hang on forever just because you would have to pay some taxes if you sold?  Of course not. Do the math and don’t be afraid of costs if you think it will pay off in the long run.

4. Don’t fall in love with an investment.

Just as there’s no perfect investment, there is no investment that you should expect to remain perfect for all time. I see this as particularly applicable to thinking about index funds—an investment that appears awfully close to perfect right now.

I believe that low-cost index and factor funds are the best way to invest—and there’s plenty of supporting data. But we should never be too comfortable. Currently, indexing works exceptionally well. But it may not work forever. Markets are dynamic. Indexing might begin to work less well or other forms of investing might begin to work better. Anything can happen, so be careful. When it comes to your investments, you don’t want to be blindsided.

CBlakely, CFP®, CTFA

Market Corrections

The stock market got “interesting” again this week. Volatility is back after having disappeared for the last year and a half. Volatility in the markets is normal and over the long-term, a 10 percent decline in the U.S. stock market happens once a year – on average.

This week I’ve been watching the financial media try to whip this up into something it’s likely not. I’m guessing it’s good for ratings as financial shows have seen a dramatic viewership decline in the last several years. Now, it’s way too early to start calling for bear markets, but you would think we are in the middle of one if you watch the financial news. And interestingly, each barking head has a different reason for what is happening, how can that be?…. but I digress. 

The market is down a little over 10% from its all-time highs, after running up over 100% cumulatively, the last five years – with dividends reinvested. But I do understand the pain we feel from investment losses is twice the joy we get from gains.

So what should we do when the market goes down?

#1. Stick to your plan and remain focused on your long-term objectives.

If you do anything, it may be a good time to rebalance your portfolio back to your targeted asset allocation percentages.

#2. Don’t pay heed to the pundits, they are looking to stir controversy or sell something or both and don’t obsess about the market value of your investments.

We are inherently irrational when it comes to investments, it may be wise to talk to your financial advisor or planner to discuss or revisit short and long-term expectations.

No one knows whether this correction will be short-lived or turn into a long, drawn-out affair. No one can predict how investors will react given the hundreds of variables that shape global market returns daily. But if you have a plan of attack or have put one in place working with your advisor, you sidestep the emotional flight response and hopefully will look back on this another behavioral vulnerability overcome. 

CBlakely, CFP®, CTFA                            02-2018