As I noted here last week, despite the market turmoil, it is important to remember that we planned for this. We have prolonged periods of market stress built into our financial plans.
It’s also moments like this when we can see whether we’ve accurately assessed your risk tolerance. Every client has an Investment Policy Statement (IPS) that estimates how much an allocation could lose over certain periods.
Importantly, we don’t include one-day, one-week or one-month in our analysis, because those periods are too short-term. Having said that, though, all of the one-year periods that we include have awful one-day, one-week and one-month periods built in them.
As hard as it is to remember during days and weeks like these, we are seeking attractive long-term returns that sometimes require short, medium and long-term periods that aren’t easy to live through.
When we say, for example, that the stock market has earned 10-percent on average since 1927, that includes the 90+ percent losses in The Depression and the two 50 percent losses over the last 20-years.
Our strategy is picking an allocation that you can live without selling out during times like this, so that you can hold throughout the entire market cycle, which includes a lot of good times.
That’s why almost all of our clients aren’t 100 percent stocks or 100 percent bonds, but something in between to reflect their financial circumstances and personal risk tolerance.
Not owning all stocks and having some bonds for the last decade (up until a month ago) meant foregoing some return. Now those bonds are blunting the losses from stocks and earning decent returns in their own right.
We could not have predicted, even three months ago, that a virus would have come along and had this much economic impact. But we know that recessions come along with expansions, and bear markets come with bull markets.
We know that these things happen, we just never know what will cause them, how long they’ll go and how deep they will be, but our portfolios and financial plans are designed to deal with them as they come, surprises and all.