Worried About the Markets? Get an "All-Weather” Portfolio

 

February 11, 2016

 

JER WW PHOTOWith 2016 under way, many people I speak with are concerned about the stock market and the overall health of the economy. I don’t blame them. The S&P 500 is off to its worst start in history.


“How do I ensure my portfolio is prepared?” they ask.


The first step is to understand that the rewards of stocks are closely related to their risk, or volatility. The more you want of the former (reward), the more you have to accept the latter (volatility). In other words, market turbulence, rather than something to blindly fear, is the source of superior long-term returns to stocks. A Wall Street Journal post I read recently made the point well. It demonstrated how, mathematically speaking, stocks are able to demonstrate such good returns in up-cycles, precisely because they have a lot of room to rise from down-cycles.


I realize that may feel like cold comfort when you are in a down-cycle, such as 2016 has started out to be. But that is exactly why stocks are not your only asset. You need a diversified portfolio that includes bonds, which have been doing better than stocks recently, as the table below shows.

 


Asset Class
2016 YTD Returns
(as of 2/5/2016)
U.S. Bonds     +2.26%
U.S. Stocks     -7.85%
International Stocks     -7.92%


 
  
 
 

 

 

So why not add even more bonds? The problem with a portfolio of all bonds is that inflation can easily outpace your return in the long run. You need stocks to stay ahead of inflation. Think of stocks as your sails for when the wind is strong and the seas navigable. Bonds, then, are your anchor in stormy weather. The point is, both stocks and bonds have a place in your portfolio. Stocks deliver superior returns in up markets. Bonds help you ride out the inevitable down markets.


Speaking of which, just how bad do things look right now? Based on what we have seen so far, this environment is very different than the credit crisis of 2008 which kicked off the Great Recession. Then, it looked as if the entire financial system might collapse. Complex mortgage-related instruments that no one truly understood drove the cycle. By the time people understood what was happening the damage had been done.


What we have now is nothing so drastic. It looks to be more of a normal turning of market and economic cycles. In fact, the U.S. economy is doing fairly well, with positive (but slow) growth in the most recent full quarter. The main problems appear to be struggles in other parts of the world that are negatively impacting us.


As a final thought, your financial ship may be trimmed out with the best sails and the strongest anchors available. But it won’t get you where you want to go unless you also have a map. For clients of PARTNERSINWEALTH, that is your investment policy statement. Take a look at it and you will see it is designed to lead you to your goals through good markets and bad. And over the course of a lifetime you will inevitably experience both.


If you do not have an investment policy statement, and lack the peace of mind that comes from a financial ship that is outfitted for all weather, contact PARTNERSINWEALTH. We have been reducing financial uncertainty and guesswork by taking a 360-degree view of our clients’ financial lives for over thirty years. To learn more, please contact Jim Waters, CFP®, at 713.964.4028 or jrw@partnersinwealth.com.