During financial crises like the Dot-Com crash in March 2000 or the 9-11 terrorist attacks, stock prices suffer initially but they eventually recover. If an investor puts 100% of his or her money into stocks, that investor will suffer a loss. With a balanced portfolio, however, savvy investors can mitigate their risk. For example, a portfolio with 60% in stock and 40% in bonds will be less dramatically impacted following a financial crisis. In the short term, a balanced portfolio will still suffer a hit, but historical data shows us that, over longer periods of time, returns for balanced portfolios are better for investors who stay the course.
Part of the problem is that fear and uncertainty sometimes lead investors to sell their investments during difficult economic times, putting downward pressure on the market. Trading based on such emotions can be detrimental to an investor’s portfolio, sometimes causing the investor to incur short-term losses. This problem is compounded as investors take their time to get back into the market. When this occurs, investors are missing out on potential gains during the subsequent economic recovery.
Diversification can also limit losses during turbulent market conditions. This strategy reduces risk over the long run, though not always increasing an investor’s return. A diversified portfolio helps mitigate the extreme highs and lows of the marketplace. Government bonds are guaranteed by the U.S. government, whereas stocks are more volatile. A portfolio including both types of investments will reduce an investor’s risk over one that just includes stocks.
The lesson here – patience can pay dividends. We recommend that investors work with a firm like Synergetic Financial Management that is experienced in the ups and downs of the market place and that selects a balanced portfolio based on their risk tolerance and financial goals. If you’d like to learn more about our wealth management strategies or want a review of your current portfolio, call us at 206-386-5455 or email us today. We’d love the opportunity to show you the possibilities!
To your wealth,
Joe Maas, CFA, AVA, CFP®, ChFC, CLU®, MSFS, CCIM
President of Synergetic Finance