Turbulence

It’s getting bumpy again. Watching the value of one’s portfolio fall is no fun, and it can be frightening for some. As I was thinking about an appropriate description for what has been going on in the financial markets recently, the word “turbulence” kept coming to mind.

Turbulence is a word most closely associated with flying, and not in a good way. Frankly, when you stop to think about it, the act of traveling by commercial airline is fraught with uncertainty. Historically, the odds are in your favor that you will arrive at your destination safely, but it still requires an act of faith to board the plane.

Thankfully, I have never experienced a life-threatening situation while flying, but the risk is always present. If our general preference in life is to avoid risk (rather than to seek it), then why do we fly? Very simply, it is often the most efficient method of transportation. If I could be delivered to my destination via a more efficient, more comfortable, and less risky medium, I would certainly choose that option.

Can we draw similar parallels to investment portfolios? If all risk could be avoided and a sufficient and secure nest egg would be waiting for us at retirement, life would be so much easier. The primary reason we take risk (or should take risk) is to achieve our individual investment objectives. If those objectives could be achieved by simply owning Treasury bills, then perhaps we don’t need to assume any additional risk. For most of us, however, we must be willing to accept some level of uncertainty in order to achieve our financial goals. Similar to flying, we hope the journey will be smooth, but at the same time we recognize there may be trouble along the way and we accept it. No one is going to jump out of a plane if it hits some turbulence. However, every time the financial markets hit a rough patch, there are going to be some investors who can’t take it and decide to “bail out”. Regrettably, they often call it quits near the bottom of a cycle which can result in serious long-term financial consequences.

When the news is grim and financial markets turn volatile, I return to my personal Investment Plan. This document helps to put everything in perspective. It is a useful reminder that financial markets go through these cycles quite frequently, and over long periods of time, the reward for remaining steadfast to a disciplined strategy is worth it. When times are tough, it is difficult to think about the long-term rewards and no one is immune from fear. To help put the recent past in perspective, the S&P 500 index has gone through the following peak-to-trough cycles over the last five years:

That is some serious turbulence! The key take-away is that those who quit when times are tough have very little chance of capturing all of the subsequent upside. Intelligent folks have spent decades trying to figure out the secret for picking the bottom (or top) on a consistent basis. The result of all that effort is that there is still no guaranteed method for capturing return without taking risk.

What is your acceptable level of risk? How do you determine that level and how do you best implement an investment strategy that will provide efficient returns (i.e., a fair return for a commensurate level of risk)? These are questions that are best answered working in partnership with a qualified financial advisor who is willing to listen to what is most important to you and who is willing to help you stay committed to your plan when the going gets rough. Give us a call today if you are serious about creating a prudent and thoughtful plan for your future.