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Diversifying Your Investments May Lead To Better Outcomes

By | 2018, Money Moxie, Viewpoint | No Comments

Is this as good as the U.S. economy is going to get? This is the question investors have been asking as storm clouds have settled over the stock market. During all this commotion, a silver lining can be seen with a strategy that may be helpful.

The paradigm shift for stocks, which began in October, is reminiscent of a change in early 2000 when a positive run for technology stocks abruptly ended. Unnoticed by some in 2000, the economy was still growing and a rotation of leadership in the stock market presented investors with new opportunities. This is where diversification can help.

Take a look at the graphic below. Diversification lost when the market lost and made less when the market gained. Despite these disappointing facts, the diversified portfolio would have made more money!

Why does diversification make a difference?

  1. Limiting your losses helps.
  2. No one knows when the market will rise or fall, so any strategy attempting to capture the up and avoid the down is unlikely to do well.
  3. While there is no way to accurately predict the future of any one company, the market tends to rise over long periods of time – making losses temporary for those who stay diversified and invested.

As the storms arise, think of diversification as your umbrella. You may still get a little wet, but it will help. Your long-term perspective and optimism will help you hang on until the sun shines – and it will shine again.

The new year will continue to bring many opportunities for investors, especially with positive economic growth. There are no guarantees, but the current forecast calls for a 2.5 percent increase.

*Diversification History data provided by Blackrock. Diversified portfolio consists of 60 percent stocks and 40 percent bonds. The S&P 500 is often used to represent the U.S. stock market. One cannot invest directly in an index. Past performance does not guarantee future results.

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How Can I Stay Calm When the Market Isn’t?

By | 2018, Money Moxie, Newsletter | No Comments

2018 has been a year of market volatility, and that can be scary at times. When market volatility hits, here are three things that can help you stay calm.

1. Focus on the Long-Term
When we create financial plans, we focus on your long-term goals. When market volatility strikes, think to yourself, “Have my goals changed? Do I want anything different out of my investments than I wanted before?” If your long-term goals haven’t changed, then you are still okay. If your long-term goals have changed, talk to your financial advisor and see what the best course of action is.

Before you make any knee-jerk reactions to market volatility, focus on the long-term. We don’t want to sell out, lock in losses, and not have the opportunity to benefit from the market growth that will come later.

2. Trust Diversification
Investing in a diversified portfolio is even more critical when market volatility is high. We keep our portfolios diversified to help lessen the effects of market volatility. The basic idea of diversification is to spread your investments across many different areas of the market in order to reduce the risk. It usually works when things get rough because you don’t have all of your money in the part of the market that is losing the most.

With your diversified investments, you are likely to still lose in a down market, but you should lose a little less. Most of the time, a diversified portfolio will come out ahead of a non-diversified portfolio after enduring the ups and downs of a market cycle. Remember, diversification works!

3. Volatility = Opportunity
You’ve probably heard this saying your whole life: “Buy low, sell high.” That is the right mindset to have when it comes to investing, and we all know it. However, as humans, our emotions get in the way, and we convince ourselves to do the exact opposite.

Why would we ever be tempted to buy high and sell low? It is common to feel comfortable investing into something that has been going up because we assume it will continue. Again, we believe the trend will continue when the market is falling and is at a low point. As an investor, it is helpful to remember that changing our strategy based on how we feel can often be counter-productive.

Market volatility can create major opportunities to buy in at lower points. Try looking at it this way: if you find a nice coat, you’d be more likely to buy it at 10% off, right? It’s the same way with investing. We want to buy at a “discount” to maximize the value we can get out of an investment. It can be hard to remember this in volatile times, which is why it is essential to have a professional who is experienced and educated in your corner to help you make sound investment
decisions.

 

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Crisis Overseas Taking Investors on Wild Ride

By | 2015, Money Moxie, Newsletter, Viewpoint | No Comments

This July, the Lagoon amusement park in Farmington, Utah, opened its most thrilling ride ever: Cannibal. This coaster reaches 70 mph. It includes a 208 foot drop and 3 vertically inverted free-falls. The L.A. Times rated it 2015’s 20th best ride in the world!*

Honestly, I haven’t been on the ride, yet. I have found plenty of excitement this summer in the stock market as it has risen and fallen with news from overseas.

The market often feels like a roller coaster and it seems like it has been steeper lately. As our economy has improved, others have faltered, particularly China and Greece.

We know that over long periods of time the U.S. markets have been good at dropping investors off higher than where they started. So, the key for us is to get on the ride correctly and stay seated until it is over.

Diversification Is Our Safety Belt
One of the first things we do on a roller coaster is secure our restraining device and keep it on during the ride.

As investors, we live with uncertainty and we expect to be rewarded for it. Deploying a globally diversified portfolio can help us capture more opportunity.

Greece is a long way from the United States, but it has had a large impact on our daily stock market returns this summer. Greek debt is twice as big as its economy and growing. In the entire world, only Japan has it worse. (U.S. debt is approximately equal to its economy.)

As part of the European Union (E.U.), Greece has received more loans just to service the payments on the existing ones. In return, the Greek government has been forced to cut spending and raise taxes (ingredients not typically found in a recipe for economic success).

What’s next for Greece? Its economy is deteriorating, but I expect the alarm will quiet down for a little while. In the coming years, the Greek crisis may return.

Fortunately, the United States is an economic leader, not a follower. The Greek crisis is unlikely to drag us down. Its economy represents 2 percent of that of Europe and just 0.28 percent of the world’s.

Learn to Love the Dips
The twists and turns of the ride can be unpredictable, but we know where the roller coaster ends. Loving market declines may be asking too much from any of us.

If we truly believe the market will be higher years from now then we should view every short-term drop as an opportunity to buy low. So, stay in your seat and if you really want to prosper in a crisis, try the Warren Buffett way and buy more during the dip.

It also helps to remember that the stock market is not the economy. The market goes up and down daily on all kinds of news that may seem important, but does not fundamentally change the economic future.

Over the last five years, China has had one of the best economies in the world and one of the worst markets. In the last year, its economy has slowed from 7.5 percent growth to just 7 percent. (The U.S. economy is currently growing at 2.8 percent.) In response, the Chinese stock market is down almost 30 percent since June.

The Chinese government often states that “confidence is more valuable than gold.” So, even though it sees this bear market more like an interruption than an economic emergency, it is trying to stop the drop. Will government efforts to control the free market work? It is doubtful. Expect more news of volatility from Asia in the coming months. Over the years, look for the economy to continue to grow and the market to eventually follow.

Investing can be a wild ride. There are days, weeks, and months that can be difficult. So keep your arms and legs inside the ride at all times and hold on! Unlike a real roller coaster your long-term, diversified investments should help you end higher than where you started.

 

*Brady MacDonald, “32 Best New Theme Park Additions of 2015,” L.A. Times, December 14, 2014.
Research by SFS. Data from public sources. Investing involves risk, including potential loss of principal. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based on market and other conditions, and should not be construed as a recommendation of any specific security or investment plan.

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