Handling Market Gains

The first few weeks of January, 2018 have begun with strong gains in nearly all global stock asset classes. This follows the significant gains of US and International stock markets in 2016 and 2017. These gains have rewarded many investors.

We want to remind you of some important statistics and how we handle market increases for our clients.

Over the long term, it is normal for the S & P 500 (large US stocks) and many other markets to decline more than 20% in 1 out of every 5 calendar years.

  • However, the S&P 500 has not had a down calendar year since 2008. So there certainly has not been a 20% decline in the past 5 years. While we recommend a globally diversified portfolio which owns many more asset classes than the S&P 500, this data is still very useful for informational purposes.
  • This does not mean that we expect a major decline in the near term, but we want you to be prepared for such a decline.
  • A major decline, such as 20% or more, is not an “if”…. it is a matter of “when” the next large decline will occur.
  • Historically, these declines are temporary, as the markets eventually climb higher.

It is historically normal for the S & P 500 (large US stocks) and many other markets to decline approximately 14% at some point during most calendar years. This is called an intra-year decline.

  • While the market may rise for a calendar year, there is usually a peak to bottom decline averaging 14% at some point during most years.
  • There has not been such a decline since early 2016.
  • We cannot predict if there will be such an intra-year decline in 2018, but we want you to be prepared for it.

We provide advice to our clients for the long-term. We determine your individual stock allocation based on your personal goals, as well as your need, ability and willingness to take risk.

By having a stock allocation suitable to your circumstances, we enable you to benefit from the gains of the stock market as well as limit the downside risk of exposure to losses. Further, through the discipline of rebalancing, we do not allow the gains of the market to dramatically increase your risk. We feel this is a significant differentiator of our firm, on your behalf.

For example, if we agree that your target stock allocation should be 50% of your portfolio, we would invest 50% of your portfolio into globally diversified asset class stocks funds. As the markets increased, we would not allow the stock percentage of your portfolio to increase far beyond your desired stock %, such as to 60-70%, or even higher, keeping in mind tax and other personal considerations.

We saw clients of our past CPA firm whose advisors permitted their stock allocations to grow unrestrained during the late 1990s (we were not yet investment advisors at that time). People would not sell their hot tech stocks and allowed their stock allocation to grow far beyond what they intended (or what was really in their long term best interest). Then they faced huge declines in the early 2000s, when these stocks plummeted.

To allow your stock percentage to grow unchecked would be subjecting you to more risk than we agreed was necessary. We are very disciplined and unemotional about this concept. As the market gains increase the value of your portfolio, we monitor this and gradually recognize gains by selling the best performing stock funds and invest those proceeds into fixed income (generally less volatile investments).

This is a major advantage of investing in mutual funds over individual stocks. It is frequently difficult for people to sell individual stocks, as they get very emotionally attached to them. When is the right time to sell Netflix, Apple, Amazon or any other stock? Who knows? How can anyone consistently know the right time to sell an individual stock?

We discuss with our clients that we cannot predict the future. We accept this as a reality. We cannot accurately time the market. We do not believe anyone else can successfully predict both the top and bottom of the stock market, consistently and accurately…. over the long term.

But we do accept the reality that the general trend of US and global stock markets is up. So if you put these concepts together (we don’t try to time stock markets and the general trend of stock markets are up), these work to your long-term advantage.

To put it simply, you are far better off having been invested in stocks over the past number of years, at whatever stock allocation made sense for your personal situation, than not having been in the market because you had “concerns” or you were “waiting for a correction” (decline) which has not occurred.

Five years ago, the S&P 500 was around 1,500. Today, it is almost 90% higher, at around 2,840. When (not if) the markets do decline from these or even higher levels than now, and even if it is a temporary decline of 20% or more, you would still be way ahead of where you would have been years ago if you had not invested in stocks. Again, we recommend investing in a globally diversified portfolio of stock funds and not just the S&P 500, so this is not an illustration of our performance.


This week’s takeaway: You will be a more successful long-term investor by being disciplined and generally sticking to a pre-determined stock allocation. When the market increases significantly, and your stock allocation grows, it is best to rebalance back to your stock allocation percentage (usually by selling some stock funds). This is a winning long-term strategy.

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