The Value of having an Investment Plan

Blog post #426

If 2018 and 2019 taught investors anything, it is the value of having an investment plan and the importance of adhering to it.

In late 2018, the US and Global stock markets declined significantly, as the S&P 500, which consists of large US based companies, dropped by almost 20%.

What were you thinking then? Did you want to stay in the market or get out? Were you fearful or concerned?

Hopefully, with the advice and counsel of your financial advisor, such as our firm, you decided that it made sense to stay invested in stocks and adhere to your long-term investment plan.

For clients who remained invested, we viewed such a downturn as a buying opportunity and would have purchased stocks in late 2018 or early 2019. Buying stocks when others were selling and when markets look ominous takes discipline. That is one of the values of working with our firm, as we don’t react with emotion, we react with sticking to your long term asset allocation between stocks and fixed income.

By sticking to your plan, by remaining disciplined or allowing us the discretion to be disciplined for you, you were rewarded in 2019 with strong stock performance across asset classes, in the US and Internationally.

Stock markets do not have a memory. Don’t try to time the markets. Don’t try to figure out when to get in and when to get out. It is too hard to consistently be correct – and you need to be accurate twice, trying to time when to get out and when to get back in.

It makes much more sense to develop an investment plan, which we call an Investment Policy Statement (IPS).  An IPS provides for the allocation percentage to stocks that helps you reach your financial goals and the level of risk that you can be comfortable with, which enables you to remain invested during down markets and times of uncertainty (which is really always!).

It may seem easy today to invest or remain invested, after a year of significant gains in a diversified portfolio. But when volatility or an extended down period returns, we hope that you see the value of our advice and guidance.

Providing you with regular and timely information and guidance can help you to be a better long-term investor. Being out of the market for a few key days or during a quick upturn can have a dramatic impact on your long-term finances. As our blog post in November, 2019 showed, Importance of Staying in the Game, missing out on only the top 5 days of the S&P 500 between 1970 and August 2019, over 29 years, reduced the return of $1,000 invested in 1970 from $138,908 to $90,171.

That is incredible and reinforces the importance of remaining invested, regardless of the news, forecasts or other future concerns. There will always be uncertainties to deal with, such as politics, recessions or world turmoil. We will never know the best time to get into or out of the market because we cannot predict the future. That makes sense, as global stock markets offer you greater potential for returns than investments that don’t have as much risk and volatility. As the saying goes, risk and return are related. No risk, no reward.

So what should you do in 2020? These lessons and strategies are the same as we would advise in almost any year.

  • Be a long-term investor in a globally diversified portfolio.
  • Work with an advisor to determine a portfolio and a comprehensive financial plan that makes sense for your financial situation and goals.
  • Accept the market’s inevitable ups and downs, so you can reduce your anxiety about it, when the down times occur. And they will.
  • Stop trying to time the markets.
  • Try not to worry about current events and their potential impact on the markets. You can’t predict what will occur and how it will impact stocks.
  • Instead, focus more on your family, the people and things that you care about and you love to do.

Talk to us. We want to help you with any financial matter that is important to you.

If you know of family or friends who could benefit from this type of advice and guidance, please share this post with them, and let them know we are available to help them as well.

Source: This blog post was inspired by “The Market Has No Memory,” by David Booth, Executive Chairman and Founder of Dimensional Fund Advisors, dated January 3, 2020.

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *