With the recent volatility in the markets, some clients feel uneasy that we have not reacted by making changes to their investments.  At times like these, it is important to remember that employing a “buy-and-hold” strategy generally earns better returns than trying to “time” the market by jumping out when the outlook appears bleak.  Short-term volatility can certainly be restrained if an investor liquidates an investment during a down market, but then you are selling at the lowest point and missing the chance to rebound if the market goes back up.  Should you decide to get back into the market after a few days out, you could find yourself buying back in at a higher price.  You have now effectively sold low and bought high.  This strategy has not proven to be effective.

In a review of the S&P 500 Index from 1985-2015 in Business Insider, August 2015, missing the best 25 days over this 30 year period brings the return from 8.4% for a buy and hold strategy to 3.06%.  The greatest long-term threat to a client’s portfolio isn’t necessarily the downturn in the market but rather the reaction to it.  The anxiety caused by volatility and the unknown is very real.  We try to manage these feelings by choosing a portfolio that matches your risk tolerance and time horizon using basic strategies of asset allocation, diversification and periodic rebalancing.  A certain amount of assets should be kept liquid for your comfort level so that you know your immediate cash needs are taken care of and that you have enough reserved to give you peace of mind during volatile time periods. 

In a driver’s education class many years ago, the teacher talked to us about highway driving and speeding.  He said that you can drive erratically, switching lanes back and forth to try to get ahead or you can continue to drive in your lane at the appropriate speed. If you drive at the appropriate speed, you will arrive at the destination with less risk and within a time period that is nearly identical to the time you would arrive if you drive erratically. 

Lisa A. Dugan

posted 24 September, 2015 at 1:00