1

Failing to have a plan

Investing without a plan is an error that invites other errors, such as chasing performance, market-timing, or reacting to market “noise.” Such temptations multiply during downturns, as investors looking to protect their portfolios seek quick fixes.

Developing an investment plan doesn’t need to be hard. You can start by answering a few key questions. If you’re not inclined to make your own plan, a financial advisor can help.

2

Fixating on “losses”

Let’s say you have a plan, and your portfolio is balanced across asset classes and diversified within them, but your portfolio’s value drops significantly in a market swoon. Don’t despair. Stock downturns are normal, and most investors will endure many of them.

Between 1980 and 2019, for example, there were 8 bear markets in stocks (declines of 20% or more, lasting at least 2 months) and 13 corrections (declines of at least 10%).* Unless you sell, the number of shares you own won’t fall during a downturn. In fact, the number will grow if you reinvest your funds’ income and capital gains distributions. And any market recovery should revive your portfolio too.

Still stressed? You may need to reconsider the amount of risk in your portfolio. As shown in the chart below, stock-heavy portfolios have historically delivered higher returns, but capturing them has required greater tolerance for wide price swings. 

The mix of assets defines the spectrum of returns

Expected long-term returns rise with higher stock allocations, but so does risk.

The ranges of an investor’s returns tend to widen as more stocks are added to a portfolio. We examined the calendar-year returns between 1926 and 2019 for 11 hypothetical portfolios--book-ended by a 100-percent investment-grade bond portfolio and a 100-percent large-cap U.S. stock portfolio and including in between nine mixes of stocks and bonds, with each mix varying by 10 percentage points of stocks and bonds. The results include notably narrower bands of returns and fewer negative returns for bond-heavy portfolios but also smaller average returns.



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