Why Staying The Course Is Important

I am not normally a fan of Jim Cramer, the loud, stock-picking host of CNBC’s “Mad Money.” That said, he recently had a sensible reflection about the recent weeks’ market decline: “No one ever made a dime panicking.”

Truth.

Most advisors, including me, preach staying the course, having a long-term goal, and an asset allocation model. We caution against selling out, especially now. We talk about risk/reward tradeoff, and pride ourselves on educating investors about the probability that the stock markets will reward us in the long run for taking on additional risk.

All of this is easier said than done, of course. Especially in uncertain times like we’re experiencing now, especially with the 2008-2009 stock market crash still looming large in our memories.

One of the most ultimately unfavorable things that you can do for a portfolio is to change allocations according to the stock market environment – that is, moving to a more aggressive (stock) allocation once the market is up, to enjoy, in theory, any remaining upswing; and/or moving to a more conservative (bond or cash) allocation once the market is down, to avoid, in theory, any further falls.

These sorts of activities usually make us feel better in the short term – the value of which should not be dismissed. It’s hard to do nothing; it feels much better to do something. However, either of those moves usually results in selling low (after the markets have dropped) and buying high (after the markets have risen), both of which are the opposite of what we’re all supposed to be doing, right?

An “all-weather” portfolio generally includes enough in stocks so that you are happy with your stock allocation in a good stock market (you don’t feel like you are missing out on any upswing), and not so much in stocks that you are worried in a down market (you don’t wish that you had less allocated to stocks during a downturn).

If you’ve worked with your advisor to structure a well-diversified long-term portfolio, then this same portfolio that was suitable a month ago should be suitable now, and should also be suitable a month from now, regardless of what the markets have done or will do.

We all do better with a little bit of guidance. Talk to us if the recent market downturn is making you wonder whether your current allocation is the right long-term one for you.