In the financial industry, most advisors are trained at a very early age to essentially remove the word “guarantee” from their vocabulary. For obvious reasons, when investors are dealing with managing portfolios that have any exposure to the stock market, there is never such a thing as a guaranteed return. If you want guarantees, you generally look to a Certificates of Deposit (CD) with FDIC protection or US Treasury Bonds that are guaranteed by the full faith and credit of the US Government (all jokes aside). So uttering the word “guarantee” anywhere in the same vicinity as a discussion about stock market investments is totally off limits.
Well, I am going to run head-on into the forbidden term and come right out and guarantee you something. I GUARANTEE THAT IF YOU HAVE A PROPERLY DIVERSIFIED PORTFOLIO THAT YOUR ACCOUNT WILL LOSE VALUE OCCASIONALLY.
That’s right, I said it and I will say it again. I GUARANTEE THAT IF YOU HAVE A PROPERLY DIVERSIFIED PORTFOLIO THAT YOUR ACCOUNT WILL LOSE VALUE OCCASIONALLY.
When you have a properly diversified portfolio, it means that a portion of your account will be invested in the stock market (likely both US and International markets). There has never been a period greater than a few months where a diversified portfolio didn’t lose value. Markets never just go straight up. And while historically the decline in value is temporary, it does happen and will continue to happen. Over the years, I have often told our clients that it isn’t IF your account will lose value it is WHEN and HOW MANY TIMES it will lose value over an investor’s lifetime.
Now before you start to panic I want to digress and point out that there is a difference between losing value v. losing money. As stated above, your 401k will drop in value from time to time. But for you to actually lose money in your 401k takes an additional action on your part. It is only when you sell while the market is down that you are taking the temporary decline and making it a permanent loss. That is when you lose actual money in your 401k, not simply when the market declines. (For further explanation on the difference between losing value v. losing money read my blog, If You Don’t Sell You Don’t Lose.)
And not only are market declines normal, I would argue that they are necessary. Yes, I said necessary. If markets never declined, then there would be virtually no risk, and in the absence of risk there is always an absence of attractive returns. We need the volatility and risk in the markets to create the above-average returns that have been generated over the long term versus riskless investments with no volatility. To put it another way, the reason that banks do not have to offer high yields on their CDs is because there isn’t any risk to invest in a CD (assuming the bank has FDIC protection). There is no such safety-net in the stock market, which is a big reason why investors that have stayed invested in the market over a long period of time have been rewarded with handsome returns well in excess of CD rates. In short, without the risk there are no rewards.
If you are reading this, there is a very good chance that you are an investor. You likely have a 401k and presumably blooom is managing it for you. If, for some reason, you became a blooom client under the false assumption that we would prevent your account from ever declining in value please do one of two things, either immediately change your expectations to account for future declines in value OR contact us immediately to cancel your investment advisory contract with blooom. Because blooom cannot change the normal course of the stock market.
After all of this, a question you might be left with is, what do I do when the market declines? Or maybe the better question should be, what shouldn’t I do? As explained above, you should not sell. Selling will only convert the loss of value to loss of actual money. If you really want to take some action during these down times, then treat market declines like “Black Friday Deals” after Thanksgiving and BUY. Times when your account drops in value means that your investments have essentially just gone on sale and like all good sales, they don’t last forever. The markets and your portfolio value will recover over time and those discounted prices will go away.
Published on November 30, 2015