This week's Around The World (ATW) looks squarely at the issue of risk. In the investment industry, the word risk is often softened by euphemisms such as "volatility" or "variability," when what we should be talking about is not merely risk, but portfolio losses. Losses that can be significant depending on the year(s) and result in your investment nest egg losing half -OR MORE- of its value in a short period of time. Losses that can take your focus off the long term and shift to the short term where panic and fear replace rationality, to your financial detriment. This includes second-guessing your Advisors' advice and moving your assets from Advisor to Advisor in a desperate attempt to get back what you lost. Or worst of all, taking control of your finances -the investment equivalent of storming the cockpit of a plane experiencing extreme turbulence and wrestling the controls from the pilot -a licensed, trained professional who would otherwise save you from your fate.
The attached graph courtesy of JP Morgan Asset Management, illustrates the severity of market losses over the past 20 years, where capital markets lost 53% on average in each of the two terrible Bear Markets since the beginning of the 21st century. Of course equity markets recovered from these losses and went on to post impressive gains that set new heights for long term investors. But here's the thing: can you stay the course when markets go down and go down big time?
That's not only a fair question that Financial Advisors should ask each of their clients, but a question that each client should ask themselves. Be honest. We all want higher returns from our portfolio, but do we have the stomach to suffer huge losses in our pursuit of higher returns? Investor Psychology 101 says that investors "fear losing what they have more than they fear not having more." And in knowing this principle, our portfolios include a large weighting in government and corporate bond funds. Sure, these positions seem like dead weights when equity markets are surging ahead, but they will be your salvation when equity markets plunge.
Have a good look at the P/E multiple of the S&P 500 (the broadest measure of US stock markets). It currently sits at 17.5 times. That's HIGHER than the P/E multiple in October 2007 before stock markets tanked, and lost 57% of their value over the next year and a half. I don't have a crystal ball, but stock markets are due for a correction. Meaning that they are due to go down and go down big time. The good news? I've built in significant protection in every client portfolio, ensuring your money will not be exposed to the full brunt of the next market correction. If the next market crash is Hurricane Irma, then think of your money as having been moved safely inland for some time now. The view may not have been as nice as could be, but when all hell breaks loose, you're safely out of the path of destruction.