Getting Back to the Basics - Safe Investing
In today's difficult financial market, it's hard to pick up the paper or turn on the TV without seeing the latest news about stock prices.
For many investors, market volatility has created an emotional rollercoaster.
People are naturally concerned about being able to meet their financial goals and have questions about how to chart a safer course through a turbulent economy.
While there are aspects of our current economic crisis that seem unique to our times, the basic rules of investing-and getting a good night's sleep-remain the same.
Remember, our economy has been through periods of extreme distress before and has always recovered.
America's traditions of innovation and optimism will continue to provide the U.
S.
economy with a strong foundation for many generations to come.
As you review your financial plan, here are five tips for helping you get "back to the basics.
" 1.
Put Your Plan in Writing.
An investment policy statement (or "IPS") serves as a roadmap for your financial plan.
Your IPS is a set of written instructions for managing your portfolio.
When markets are highly volatile-as they are today-your IPS helps keep your financial plan on the right track.
An IPS begins with your personal financial objectives, which may include planning for retirement, saving for a family member's education or buying a new house.
Next, your IPS will list your time horizons for each goal, as well as any general preferences you may have about how your portfolio is managed.
Finally, your IPS will include tax considerations, your risk tolerance, asset allocation goals and appropriate benchmarks for measuring performance over time.
At Robinson, Tigue, Sponcil and Associates, we encourage all of our clients to create an IPS.
If you already have an IPS, we recommend reviewing it at least once a year to ensure that it continues to reflect your goals and priorities.
2.
Stick with Your Plan Staying invested when markets are down isn't always easy, but history suggests keeping a level head is always the best course of action.
Consider the example of Warren Buffet, one of the greatest investors of our time.
Between July 17 and August 31 of 1998,Warren Buffet's shares in his investment firm, Bershire Hathaway, declined by $6.
2 billion.
However, he didn't lose any money because he had confidence in the companies he owned and confidence in the future of the world economy.
He held onto his investments and the share prices soon recovered.
The lesson here is the importance of sticking with your financial plan in all market conditions.
3.
Be Patient Remember, the stock market has historically recovered faster than the economy.
If you sit on the sidelines and wait for the economy to recover, you're likely to miss out on some of the most dramatic gains in the stock market's recovery.
Since the end of WorldWar II, we've had 12 bear markets (excluding our current market crisis).
The average drop in the market was 30%, and the average duration of the bear market was 15 months.
The stock market has historically begun to recover within three to four months of hitting the bottom.
Yet the economy historically hasn't begun to recover until nine months after hitting the bottom.
History tells us that those who stay invested in the market are rewarded, while those who wait on the sidelines often miss out on the biggest market gains.
4.
Have Realistic Expectations Many investors want their portfolios to return 11% a year, but are unaware of how much risk that type of return potential requires.
Rather than chasing the highest returns possible, consider setting realistic expectations based on your personal goals and risk tolerance.
Remember-the higher returns you seek, the more risk you may need to take on.
For example, if you wanted an 11% return and were invested in the stock market from January 1950 to December 1984, you would have seen a wide range of both highs and lows in your portfolio.
The largest drop in your portfolio would have been 30.
2% and the largest gain 50.
8%.
Volatility is the price you pay to make an 11% return.
5.
Focus on What You Can Control There are many things we can't control, including the price of oil, world politics and the timing of a market recovery.
However, there are a number of things you can control in your portfolio.
By focusing on what you CAN control, you increase your probability of success.
For example, you can: • Keep fees and expenses low • Keep your taxes low • Manage risk through diversification and rebalancing • Hold yourself and your financial advisors accountable to a fiduciary standard.
Reviewing and updating your investment policy statement (IPS) as needed will help you take control of your portfolio and stay positive in a difficult market environment.
Remember, an IPS lists your objectives, time horizon, investment philosophy, preferences and constraints, tax issues, risk tolerance, loss limits, asset allocation targets, and appropriate benchmarks for performance.
Look Toward the Future Taking a long-term perspective and getting back to basics can help you feel more confident when markets are struggling.
All crises are temporary-we'll get through our current market crisis and come out stronger for the experience.
America is a great country and our financial markets are extremely resilient.
Now is the time to stick to your financial plan and make investment decisions that reflect your values, time horizon for investing and goals.
For many investors, market volatility has created an emotional rollercoaster.
People are naturally concerned about being able to meet their financial goals and have questions about how to chart a safer course through a turbulent economy.
While there are aspects of our current economic crisis that seem unique to our times, the basic rules of investing-and getting a good night's sleep-remain the same.
Remember, our economy has been through periods of extreme distress before and has always recovered.
America's traditions of innovation and optimism will continue to provide the U.
S.
economy with a strong foundation for many generations to come.
As you review your financial plan, here are five tips for helping you get "back to the basics.
" 1.
Put Your Plan in Writing.
An investment policy statement (or "IPS") serves as a roadmap for your financial plan.
Your IPS is a set of written instructions for managing your portfolio.
When markets are highly volatile-as they are today-your IPS helps keep your financial plan on the right track.
An IPS begins with your personal financial objectives, which may include planning for retirement, saving for a family member's education or buying a new house.
Next, your IPS will list your time horizons for each goal, as well as any general preferences you may have about how your portfolio is managed.
Finally, your IPS will include tax considerations, your risk tolerance, asset allocation goals and appropriate benchmarks for measuring performance over time.
At Robinson, Tigue, Sponcil and Associates, we encourage all of our clients to create an IPS.
If you already have an IPS, we recommend reviewing it at least once a year to ensure that it continues to reflect your goals and priorities.
2.
Stick with Your Plan Staying invested when markets are down isn't always easy, but history suggests keeping a level head is always the best course of action.
Consider the example of Warren Buffet, one of the greatest investors of our time.
Between July 17 and August 31 of 1998,Warren Buffet's shares in his investment firm, Bershire Hathaway, declined by $6.
2 billion.
However, he didn't lose any money because he had confidence in the companies he owned and confidence in the future of the world economy.
He held onto his investments and the share prices soon recovered.
The lesson here is the importance of sticking with your financial plan in all market conditions.
3.
Be Patient Remember, the stock market has historically recovered faster than the economy.
If you sit on the sidelines and wait for the economy to recover, you're likely to miss out on some of the most dramatic gains in the stock market's recovery.
Since the end of WorldWar II, we've had 12 bear markets (excluding our current market crisis).
The average drop in the market was 30%, and the average duration of the bear market was 15 months.
The stock market has historically begun to recover within three to four months of hitting the bottom.
Yet the economy historically hasn't begun to recover until nine months after hitting the bottom.
History tells us that those who stay invested in the market are rewarded, while those who wait on the sidelines often miss out on the biggest market gains.
4.
Have Realistic Expectations Many investors want their portfolios to return 11% a year, but are unaware of how much risk that type of return potential requires.
Rather than chasing the highest returns possible, consider setting realistic expectations based on your personal goals and risk tolerance.
Remember-the higher returns you seek, the more risk you may need to take on.
For example, if you wanted an 11% return and were invested in the stock market from January 1950 to December 1984, you would have seen a wide range of both highs and lows in your portfolio.
The largest drop in your portfolio would have been 30.
2% and the largest gain 50.
8%.
Volatility is the price you pay to make an 11% return.
5.
Focus on What You Can Control There are many things we can't control, including the price of oil, world politics and the timing of a market recovery.
However, there are a number of things you can control in your portfolio.
By focusing on what you CAN control, you increase your probability of success.
For example, you can: • Keep fees and expenses low • Keep your taxes low • Manage risk through diversification and rebalancing • Hold yourself and your financial advisors accountable to a fiduciary standard.
Reviewing and updating your investment policy statement (IPS) as needed will help you take control of your portfolio and stay positive in a difficult market environment.
Remember, an IPS lists your objectives, time horizon, investment philosophy, preferences and constraints, tax issues, risk tolerance, loss limits, asset allocation targets, and appropriate benchmarks for performance.
Look Toward the Future Taking a long-term perspective and getting back to basics can help you feel more confident when markets are struggling.
All crises are temporary-we'll get through our current market crisis and come out stronger for the experience.
America is a great country and our financial markets are extremely resilient.
Now is the time to stick to your financial plan and make investment decisions that reflect your values, time horizon for investing and goals.
