Surviving the Ups and Downs (Opinion)

We’ve all heard the saying “What goes up must come down.”

So, what goes down must also come back, right?

In the case of the stock market, what goes down often comes back up very quickly. Since March 2009, the general stock market has nearly doubled. The same happened after “Black Monday” in October 1987. The worst single-day loss in history recovered in two years.

The performance of asset classes  — stocks, bonds, cash, commodities and real estate — evaluated over a 15-year or longer time frame shows stocks outperform the rest every time. History shows, for example, that over 15-year rolling time periods since before the Great Depression, stocks outperformed bonds 92 percent of the time.

However, many people with 15-year or longer time horizons disregard this known probability due to the uncertainty of year-to-year performance and volatility. This is mostly due to being more emotionally sensitive to losses than gains.

No one is completely immune to emotions that influence financial behavior. We are all emotionally connected to our money at some level.

To that end, fear, greed, indecision and regret are the most common emotions that create the most pitfalls. How do we eliminate these short-term, reactive and counterproductive investment behaviors?

The following steps serve as a good collective starting point:

• Determine your long-term goals. If you have a well-thought-out financial plan that documents your long-term goals, it’s much easier to ignore the short-term events that drive the stock market’s volatility.

• Determine your risk tolerance. Are you more conservative or aggressive by nature? Or, think of this as the sleep factor. What kind of investment volatility can you sleep with at night?

• Stay diversified. Diversification helps cushion downside risk.

It doesn’t eliminate risk, but over time, the point of diversification is to spread the risk and reduce the probability of substantial losses. No one should have all their eggs in one basket, including the stock market.

• Dollar cost averaging. Rather than trying to time your entry points into the market on down days, contribute to your investment accounts in regular intervals. Again, this doesn’t insure against losses, but it does maintain a consistent stream of investing for the long term. Then when the market does rise over time, your average cost is lower than your average value.

• Rebalance. Annual rebalancing forces you into selling some investments that have performed well and reallocating those proceeds to investments that have not performed as well. This should be part of your disciplined investment plan. It helps keep the risk of your portfolio appropriate to your tolerance and your long-term goals.

• Focus on dividends. Dividends are the result of companies returning some of their profits to shareholders. It is most often one of the signs of a healthy company. Stock dividends are similar to banks paying interest on deposit accounts in that both are a return on your money.  Currently, a bundle of Dow Jones company stocks pays more than 3 percent dividend.

The average interest from four banks in our area on deposit accounts is 0.38 percent. This is down from about 4 percent five years ago, and history shows it will not go back up fast. It doesn’t take a finance degree to figure out in this Eeyore economy — one with new banking regulations and the Federal Reserve’s loose monetary policy — that interest on safe liquid investments will be very low for years to come.

If you have stayed fully invested in the stock market over the last few years, congratulations. You have almost as much — or more — money than you did before the Great Recession hit. However, you should take heed of the points above.

Because you have recovered so quickly, consider a second opinion by a professional and review the points above. Now is a good time to be prudent with your investments and determine if you are where you should be.

Remember, what goes up must come down. 

Troy A. Kestner, CFP, is a Financial Advisor with Arvest Asset Management and vice president of Arvest Private Banking in Fayetteville.  He can be reached at 479-684-4231 or [email protected].