Ups And Downs

Life is full of ups and downs.  Some days the sun shines, some days it rains, and other days, we have hurricanes.  Figuratively speaking, the same can be said about the financial markets.  Though the ups and downs are normal, many media outlets overdramatize these events.  Overabundance is sold on the upside and scarcity on the downside.  Both lead to fear-based planning which rarely ends well.  Thankfully, our counsel takes these episodes into consideration before, during and after they occur.

 We believe the road to financial independence should be freeing and fun, not stuffy and full of worry.  Let’s simplify the story so we have the information and perspective needed to make wise financial decisions.  Upon doing so, five points emerge and illuminate our path forward. 


  •  Remain Calm  

For over three decades, Alan McSmith has served as a wilderness guide exploring the African country and encouraging a deeper, meaningful connection with nature and people.  As you can imagine, his line of work leads him into uncomfortable and unpredictable situations.  Through education, experience and time tested principles, he has trained himself to remain calm in the face of uncertainty.  Though our professions are different, we employ these same resources to assist you and your family.  Together, our goal is to not get euphoric at market peaks, panic in the valleys or get overly emotional in between.

 

 

  •  Be Patient 

Buy low, sell high.  It’s so easy to say yet so hard to do.  For lack of clairvoyance, we will, most likely, not buy at the bottom and sell at the top.  Thankfully, neither is a prerequisite to be a successful accumulator of wealth.  Good investors are built by being patient over time.  Great investors are built by being patient over a lifetime.

"The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient to patient people." 
-Warren Buffett

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  •  Ups and Downs are Normal

The natural ebbing and flowing of the financial markets is normal. Since the equity markets typically receive the vast majority of media coverage, we will focus our attention here. The Dow Jones Industrial Average, referred to as the DOW, started in 1896 and consists of 30 large, publicly owned companies housed in the United States. The S&P500 is a broader, more diverse index that started in 1957 and consists of 500 large companies in the United States. Though their results are not identical, both represent large growth companies and similar conclusions can be derived by reviewing each one respectively.

In the chart below, the blue and peach bars are the final, year-end results for the S&P 500, going back to 1980, while the corresponding black dots show the intra year range. For example, in 2017, the S&P500 declined as much as 3%, from a peak to a trough during the year, while finishing the calendar year up 19%. As you can see, there is considerable movement every year though the average annual return is 8.8% since 1980. The Law of 72 states that you can divide the number 72 by your rate of return resulting in the amount of years it takes your money to double. At 8.8%, your money doubles every 8.18 years (72/8.8). Time could very well be the most critical factor in investing due to the compounding nature of money.

In numerous studies, investor behavior is the most consistent predictor of future investment results. This is demonstrated below as the average investor's results are significantly less than the listed unmanaged indexes, from 1997-2016.

 

  •  Our Main Adversary is the Rising Costs of Goods and Services Over Time 

Our most important obstacle, especially during retirement, is the ability of our income to keep pace with the rising costs of goods and services over time.  For example, the price of a stamp increased 227%, cumulatively, from 1980 to 2018 or 3.16% per year.  In this example, $1 today will have the approximate purchasing power of $.55 in 20 years and $.41 in 30 years.  We will need to increase our income by 80% to 140% in the next 20 to 30 years to stay even with the standard of living we enjoy today.


 
 
  •  Stay the Course

It is in our best interests to not try to time the markets.  The human mind makes us think we can, but it’s virtually impossible.  Other than being lucky, no one has ever timed the markets successfully over an extended period of time.  The chances of being incorrect are high, potentially leaving us shy of the goals and lifestyle visions we have for ourselves and our family.

 At a time when we experience swings in the financial markets, we may doubt the validity of our investment plan.  It is much more important to manage the resources we have accumulated rather than the resources we are trying to accumulate.  On the upside, we must run our own race and pursue only our goals and lifestyle visions for the future.  We have no control over investment results, especially those of the past.  We can control and provide a cushion on the downside by having a firm grasp on our spending and monthly budget removing unnecessary expenses, enjoying a proper Emergency Fund and striving to be debt free.

 Ultimately, there are five main investment objectives.  Our investment objective, asset allocation and timeframe should match.  If so, great.  If not, let’s have a conversation.

Our advice is centered on financial planning, investment management and making sound decisions that have withstood the test of time.  To combat the ups and downs in the financial markets, we recommend: remaining calm, being patient, understanding its normalcy, focusing our energy on our biggest obstacle and staying the course in a growth oriented, diversified portfolio relative to your goals and timeframe.  Rather than worrying, I invite you to spend time with your family and friends, do something fun or start planning the next item to check off of your bucket list.  We are here worrying about it for you.  As always, thank you for allowing us to be of service to you and your family, and feel free to contact us if you have any questions or concerns.

Best, 

 

Tim Evans CFP® CLTC
Founder

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.  Diversification does not protect against market risk.

Securities offered through LPL Financial.  Member FINRA/SIPC