Do Market Gyrations Bother You?
Jim Lorenzen, CFP®
It’s a cliché to describe the stock market as a roller coaster … but then, it always has been – hence, the cliché.
Extreme swings are not new. When I first entered the business back twenty years ago, people thought a 10,000 Dow was fantasy and 50-point swings were regarded as untenable. In fact, the exchanges instituted trading curbs to guard against such `huge’ movements in stock prices. Meanwhile, virtually everyone I met would ask me when the volatility would end!
Here it is, twenty years later, and I still hear the same comments. People always want to know ‘what the market will do.’ The answer is the same it’s always been: The market will continue to gyrate; but gains will likely outdistance losses over time just as they have since trading first began under a buttonwood tree on Wall Street hundreds of years ago.
Why are people concerned with market gyrations? Simple: They tend to equate a downward movement with a loss. These same people are likely living in houses that have gone down in value, of course; but they don’t consider that decline a loss, unless they are being forced to sell.
Unfortunately, too many fixate on short-term movements, missing the big picture.
It’s good to think of your total financial picture as a portfolio; not just one piece of it. For example, most people do have a 100% exposure to any one segment of the market. Consider this: If you had a 40% allocation to the S&P index through a fund or ETF[i] and the other 60% of your investments remained `flat’, the return, ignoring expenses for the moment, for your total portfolio would have been 4.82% due to the 40% weighting.
Obviously, the impact would be the same degree on the negative side. A 10% allocation to any asset that experiences a 30% move in price results in only a 3% affect on portfolio value!
In tomorrow’s post, I’ll show you why you may not want all of your investments to go up at the same time!
[i] It’s impossible to buy an index. You can only participate in a vehicle that tracks an index and all such vehicles have their own characteristics, which include expenses.
Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description. Nothing contained herein should be regarded as tax or legal advice and the reader is urged to seek competent counsel to address those issues. The above represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a formal financial and investment plan. For questions or comments, you can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com.
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