This week's video from Royal American Financial Advisors is entitled, "This Time is Really Different"...
Are you prepared psychologically for an inevitable market decline? Market declines occur every year to varying degrees. The circumstances surrounding a decline in the markets are never the same. It's always different!
This is a great segment to watch and learn the right things to do when the inevitable downside volatility occurs. It is extremely hard to do the right things, but extremely important to be a successful investor for your lifetime. In this video (about minute 15), find out what attributes are necessary to be successful long term.
Every client can have different levels of risk and volatility in their portfolio, from very low risk, to balanced or moderate risk, to very aggressive. It is very important that you are in a portfolio according to the level of risk you can sustain for your lifetime (or a strategy that slowly reduces risk over time), which will allow you to remain disciplined and ride through the upside and downside volatility, while allowing us to rebalance your portfolio on highs and lows. Know your risk measurements. If you know your risk measurements you will know what to expect, and won’t be caught off guard when downside volatility occurs. Greater peace of mind comes from knowing your risk and knowing what to expect in down periods and up periods.
The longer term average returns include both upside and downside volatility. Upside and downside volatility can be reduced but not eliminated in the risk part of the portfolio. Investors that tend to take too much risk, or worse, take too much risk and don’t know how much risk they are taking, tend to panic and lose large sums of money with market timing issues.
Almost every year the stock market has declines of 5% - 10% or more at some point in the year. This volatility is part of investing and we reduce our own portfolio volatility by adding high quality bonds, so we have the money to rebalance into stocks on the inevitable declines. To get the longer term average returns the stock and bond markets deliver we must be able to go through the periodic negative periods.
We don’t know when or why, but the markets often recover quickly and unexpectedly for reasons unknown to us in the present time. Investing is not easy, and it is why patience and discipline is so important in the investing process and is one of the hardest things for some investors to overcome. Most investors are not patient or disciplined enough to get the longer term average returns that are available to them. We will endeavor to make sure you are not one of those investors.
Investing discipline is difficult in up markets too. Investors get greedy in up markets and end up taking on too much risk, not even knowing how much risk they are taking. As investors, we know that the returns in any given 1 year period can vary from positive to negative. However, the longer you hold a diversified portfolio and allow us to rebalance when necessary, your risk is reduced with time and you get closer and closer to the longer term average returns. Don’t be short term focused. Every year the markets go down for a period of time for all kinds of reasons, but they also go up, often unexpectedly. The last week, month, quarter, tells us nothing about the future. Performance must be measured over years, not months. We don’t know which direction the next 20% will be, but the next 100% is always up. This fact is somewhat reassuring if you are a lifetime investor.
Watch this video to find out what attributes are necessary to be a successful investor for your lifetime.
Continue to learn, stay diversified according to your risk tolerance, stay disciplined, and rebalance. Education is your best defense against imprudent investing. Invest intelligently!
- John Borger, Royal American Financial Advisors
John Borger and Scott Buchanan of Royal American Financial Advisors, LLC provide investor education to help investors avoid costly and unnecessary mistakes, increase their potential returns, and take a more prudent approach to investing and growing their wealth.
You may contact them at (951) 679-2065, or check out their website at: http://www.myinvestmentcoach.com/