What do you do when your account values shrink in the current investment environment? You may have created a well thought out plan and were happy with your progress, then life happened! With so many events taking place today, many out of our control; how do you stay committed to your goals and keep your plan moving forward?
Perspective is helpful in trying times like these. Consider that the average intra year decline in the S&P 500 index since 1986 has been roughly 14% +/- a year. If you look back further to the 1920s, you’ll see contractions, on average, of about 16% +/- a year. In January of this year the index stood around 4,800; today it’s hovering around 4,200, that’s roughly 12.5% off its recent high. What can we take from this? Well, large US company prices expand and contract overtime. What we are witnessing now is commonplace and should not require a reaction or a change to your investments. A well-diversified portfolio should consist of all size companies here in the US and abroad.
A portfolio by itself is just an account. Having a plan which integrates your goals, and a desired timeline allows your investments to serve a purpose. When company values expand to elevated levels, it’s easy to lose track of the job your dollars serve. When company values contract it tends to grab our attention as the need to do something takes hold. You can avoid reacting in all markets, up or down, by reflecting on your plan each year. Having a guide to your investment selection puts the emphasis on what you may control. Where you choose to spend, invest, and save has a direct impact on your real-life progress.
As opportunists, choosing to continue to fund your investment accounts may serve you well as prices contract. This allows the investor to purchase more with their dollars then was possible several months ago. This is an important yet difficult concept to grasp. Your dollar goes further and purchases more when prices are lower. It never feels good when prices are off, it’s unnatural to be excited as declines take place. It’s easy to talk about “buying the dip” or “investing when markets contract x%”, a totally different experience when it’s happening live. How likely are you to continue to invest as prices drift down? Your expectations and personal experience will likely determine what you do next.
What happens next is anyone’s guess. Being a successful long-term investor requires a willingness to accept the unknowns. Whatever happens is irrelevant when your plan stretches decades into the future. Short term price movements over the coming months or year don’t influence a thirty-year retirement as much as you might think. Read that last sentence again and reflect on its importance.
It helps to understand that companies are efficient and seek to generate profits. Some companies even generate dividends overtime. Owning these companies as opposed to lending to them via fixed income allows you to participate in their future growth.
Short-term price movements in company values, both up and down, is known as volatility. Often mislabeled as risk, companies routinely shrink in value. As an equity investor, the key is to accept this fact and not act surprised when it happens. One risk to your dollars is their inability to keep pace with rising costs. Another risk may be running out of money. These are real life risks that should not be confused with volatility.
Cash reserves may take the sting out of volatile markets and allow you to continue to work your plan. Ideally, your cash is not lumped into one account where you mentally account for all the job descriptions it should serve. This stresses the brain and creates complexities when a simpler solution is available. By segmenting out your cash in various accounts, you may spend in the near term as you choose. It’s cash that allows you to keep your portfolio intact during bouts of volatility. Without the proper cash reserves, an investor may feel the necessity to liquidate. It’s not all equities nor is it all cash. It’s a balance between the two based on your needs and what you want to accomplish.
Having an emergency account for unexpected expenses is just as important as a home/fun account for capital improvements and a summer vacation. Spending what you have while investing for the long-term works. Recognizing of course, that cash reserves will never keep pace over extended periods of time with rising costs. That’s ok, as cash allows for spending today. It’s a return of your cash, not on it, that allows your plan to function. Owning thousands of companies supports your tomorrow. These companies are a great equalizer to inflation and rising costs taking place today.