Your Portfolios are Working Perfectly!

Your Portfolios are Working Perfectly!

Yup, it has happened. Andrew has lost his (expletive) mind.  How, amid a global market sell-off of 10% in 2 days, can this fool say my portfolio is working perfectly?  Has this fool finally lost his freaking mind? 

I am sure this is what is running through your minds as you read the title of today’s blog.  How can I possibly sit here and calmly state that your portfolios are working perfectly when they are down quite a bit in a short period of time?  Well, it wouldn’t be a good blog if I didn’t elaborate, so let us dive in, shall we?

Remember, I wrote a blog a few months ago saying the market is about to crash?  Now, I am not psychic, and honestly, the blog wasn’t even about predicting an imminent crash, but rather simply understanding that this is part of market cycles.  Instead, the focus of that blog was on what we call a lifeboat drill. 

The exercise that I highly encourage you all to go through is to understand your risk tolerance to a 10%-30% sell-off.  Things were going really well then as the market finished its second double-digit return in as many years.  Things may have felt euphoric at the time, and that is exactly why I encouraged you to realize not only do markets go up, but they certainly go down as well (historically, 1 out of every 4 years). 

Guess what?  We are now in that sell-off, and if you gave that blog a read, then I certainly wouldn’t recommend doing anything except trusting your gut in an unemotional time to not make a foolish mistake during an emotional time.  This is exactly why we stress test our portfolios and tolerance to make sure they are aligned with our comfort level.  Now it is time to trust your gut.

Buried the lead

Wait, did I bury the lead?  Kinda sorta yes, but it was all meant to set up my grand finale that your portfolios are working perfectly, despite a sell-off.  You see, if you have taken my or one of our advisors at Diversified, LLC’s advice that your asset allocation is customized to your stated comfort level.  For some people, that is all equity (like yours truly), and for others, that is 70% stock and 30% bonds. 

Now, here is where things get eye-opening.  Let’s focus on the 70/30 individual.  It is true that the 70% is down decently this year.  However, not as bad as you think, for starters.  You see that 70% is an allocation to international-based companies.  Although people have been questioning why they own that for a few years, since US equities have dominated, the answer is clear as day now.  While the US markets have dropped precipitously, international equities are actually up this year by over 1%.  This is exactly why we diversify to spread the risk.

However, that isn’t even the fun part of this blog.  The fun part comes when I now turn my attention to the 30% bond exposure.  We insert bonds into a portfolio as a hedge against stocks.  Said differently, any bond exposure is meant to lessen the downturns and furthermore allow our stocks to rebound from any sell-off without touching them unnecessarily.  To prove my point, as of writing this, bonds are up approximately 3.5% year to date, even though equities have gotten hammered.  On top of that, since 2/19 through my writing this, bonds are up 2.78% compared to minus 17.32% for the S&P 500. 

What does all this tell you?  Simply put, your portfolios are doing exactly what they are supposed to do.  No one, and I mean no one, can successfully market time, and honestly, that is not an investment strategy.  Rather, what a well-crafted investment strategy does is position you to take advantage of all markets and allow the outliers to run their course.  This allows you to get the long term returns that are necessary to achieve your unique financial plan and goals.

Don’t start questioning now

I’ll leave you with this thought.  Now is not the time to question your battle strategy, especially if you have partnered with one of our wonderful advisors at Diversified.  Rather, now is the time to trust in your strategy and know that it is working exactly as designed.

Hope you enjoyed this nugget, and as always, stay wealthy, healthy, and happy.