Robert Dunn, CFP®
Stop the Losses
Updated: May 26, 2022
The stock market is at it again, rearing its head providing a wild ride. Would you like to tame this beast? Well, you have the ability to do so. No, we don’t have any magic for you to make this happen, it is entirely within your control. We are not suggesting going to cash which would have its own issues; inflation and buying back into the market. So, what to do?
What is the answer? TIME. The best way to minimize volatility is to look at your portfolio less often. Volatility is a time-based concept. The value of the investments in your portfolio are moving every second. Most of you would think it would be crazy to sit in front of a monitor and watch the price of your investments go up or down throughout the day. So why do some think it is a good idea to look daily, weekly or monthly? My only assumption as to why someone would do this is they believe that by doing this they can attempt to predict and time the next market move.
A recent report looked at monthly historical returns data for four combinations of global stocks and bonds going all the way back to January of 1926, up until December 2017: 30/70, 50/50, 70/30 and 100/0. The portfolios were rebalanced back to their original asset A recent report looked at monthly historical returns data for four combinations of global stocks and bonds going all the way back to January of 1926, up until December 2017: 30/70, 50/50, 70/30 and 100/0. The portfolios were rebalanced back to their original asset mixes every year, and 1% a year in management fees were taken out. The result shows what kind of volatility you would have experienced if you had looked just once a month, once a year, once every five years or once every ten years.
Across all four portfolios, if you looked at all of them once a month, you would see a negative return about once every three months. If you looked once every 12 months, you would only see a negative return about every 6 years. And if you only looked once every 5 years, about 90% of the time you’d see a positive return. That is, 9 out of ten times, your portfolio’s value would have been higher than the last time you checked.
And if you only looked once every ten years, pretty much every time, for all the portfolios, you would see a positive return. (Just once, the 100/0 portfolio showed a small negative performance number.)
Can you do this? Well, you don’t check on the value of your house every day, week, month or even year, do you? The value of your house may well be fluctuating wildly every week, but you’re blissfully unaware of this, because you’re not getting a weekly appraisal. Chances are, your experience with this valuable and important investment is that when it comes time to sell, after multiple years of ownership, the value is greater than what you paid for it. It seems like no volatility at all.
The point here is: once you have the right investments and the right mix of investments, there really isn’t any point in checking in on your performance in the short term. You have a professional to do that—and chances are the professional won’t be acting on short term information either.