Investors trade more than they used to. Often these buy and sell decisions are emotional responses to market volatility — an attempt to limit losses in choppy markets. We believe an investor should rarely, if ever, make adjustments to their portfolio based upon an emotional response to the market. Rather, an investor should have a long-term asset allocation plan that was prepared based upon their goals and risk tolerance and have the discipline to stick to the plan in bull or bear markets.
Over the past 50 years studies show that an investor’s holding period has declined significantly. Yet, individuals are living longer and it is not uncommon for a retiree to have over a 30-year period of time where their money must be working for them. The charts below clearly illustrate the power of longer holding periods when it comes to minimizing downside risk. Simply, the longer you extend your time horizon, the less likely you’ll experience a loss over that holding period. We ran data from 1979, since that is the first year for data availability for the MSCI EAFE Index, through 2014. Take a look at the S&P 500’s performance over rolling calendar year periods:
S&P 500 Index (Annualized Total Returns)
Also, the chart below illustrates the additional benefits diversification can bring. This moderate mix of 40% 5-Year Treasury Bills, 20% S&P 500 Index, 20% Russell 2000 Index and 20% MSCI EAFE Index shows less volatility in the short-term than the S&P 500. This highlights the importance of understanding one’s risk tolerance but should also be used in conjunction with your advisor in discussing one’s goals and alternative paths to take to reach them.
Diversified Moderate Portfolio (Annualized Total Returns)
We suggest that investors consult a trusted advisor to help them develop a long-term strategic asset allocation that can be utilized in all markets or at least until an investor’s goals and time frame change.