A Surefire Way to Ruin a Great Portfolio

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When people ask me what keeps me up at night, here’s what I tell them: I hope clients don’t change their long-term plans when the next downturn correction happens in the markets.
 

I’m not predicting that a downturn is going to happen any time soon, but I am predicting that a downturn will happen again.
 
And when it does, do you know how your clients will react? Are you getting them ready now, even while markets are still doing well?
 
I’m sure you remember how many of your clients reacted in 2008-2009. Panic, shock, discouragement… I’m sure many of your clients believed they would never recover and they may have made some unwise decisions about what to do with their investments.
 
What a difference five years makes —many patient investors have been rewarded and investing simply “doesn’t feel as risky” for many of them. Some of your clients may have almost forgotten that 2008-2009 ever happened. We believe overwhelmingly that investors would not have received the returns of the last five years without participating in 2008-2009!
 
So why am I concerned and losing sleep? I firmly believe that the best portfolio (plan) in the world can quickly be ruined by bad investor behavior.
 
As the Cycle of Market Emotions chart above illustrates, it can be easy to let emotions guide how we react to market movements. Exuberance or panic can cause us to buy high or sell low —potentially compromising, even derailing, our long-term financial plans.
 
To help frame an interesting market fact: As measured by the CRSP 1-10 Index, since 1926 there were 115 negative quarters out of the 352 total quarters (32.7%). On a fiscal year basis, there were 22 negative years out of 88 total (25%).*
 
Periodic market declines are the necessary and normal price of successful investing. It is unrealistic to expect to earn the long-term historical returns of global markets without experiencing some ups and downs along the way. To state the obvious, if there was no risk, there’d likely be no return.
 
Your role as a trusted advisor is to help your clients manage through bear and bull markets and keep them on track towards what matters most — achieving their long-term goals! There is no better time than now to have that conversation.
 

 
*Source: DFA Returns 2.0, May 2014
 
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