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Many investors found themselves with too much risk for their tolerance level as the market tanked last fall and then fell even further through early March. The rear view mirror approach of many advisors left people with the remnants of winners from 2006-2007. Emerging market funds as well as too much money allocated to those funds investing primarily in energy populated many accounts. The generic disclaimer that “past performance is no indication of future results” meant nothing to many until they were faced with the reality of losing large sums of money.
Having been in this business more than two decades, we have witnessed the bursting of many bubbles, the most recent being the internet and real estate bubbles. Investors, in lemming-like-fashion, after having overweighted industries that were too economically sensitive and thus fell like a rock as the economy tanked, then scurried into riskless money markets and government bonds after the damage had already been done to their portfolios. We believe that this has created a bubble of sorts in that many investors are finding themselves with little or no “risk” and consequently little chance for appreciation in their portfolios. With the market gyrations of the past eighteen months, it is not hard to understand that many investors want the certainty of guarantees. However, with that certainty, investors must be willing to accept miniscule returns.
These returns tend to be acceptable during periods of negative returns for riskier investments such as stock, stock-based mutual funds and even corporate bonds. In fact many investors find comfort and may experience almost a sense of “I told you so” when the stock market declines. That said, over the past quarter, the global stock market has risen more than thirty-five percent, perhaps luring some back in. We encourage investors to take a more balanced, longer-term and perhaps objective look at their financial goals and then design a strategy to help them achieve those goals rather than utilizing the “rear view mirror” approach noted above.
THE BOTTOM LINE - it is imperative to design your portfolio according to your objectives, your risk tolerance and to perhaps balance out your investments to weather difficult times. This balance enables investors to sleep at night by limiting the volatility of their account values and, during these times maintain and objective, rational approach to their portfolio rather than a subjective, emotional one. Investors have found that it is never easy to lose money but on the other hand it is also never easy to sit idly by while others make money. The diverse approach of a balanced portfolio gives investors the chance to participate in the upside when markets move higher as well as more easily weather the downside which will, at some point, inevitably return.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.