This week's Around The World (ATW) revisits the issue of Risk, and will do so for the balance of the month. Risk does not mean losses necessarily, but the potential for losses are always part of risk. Diversification is a way to reduce risk and reduce losses in your portfolio, but it is not the same as protecting your money from losses in a given time period. When markets decline, investors can expect declines in their portfolios, no matter how well diversified.
The attached Bull & Bear graph shows how markets have behaved over the past 60 years. The good news? Markets have gained over time far more then they haven't. But look closely at the numbers in red, the ones with the minus signs in front of them. Depending on the year, markets have fallen between 14% and 51% and regardless of portfolio composition, investors finished the year with less money than when they started. 1987 was 40 years ago, but I remember the headlines in the newspapers and the apocalyptic terms used to describe the 23% decline -in just a single day.
What followed of course was a rebound in prices, with things really picking up in the 1992-2000 years, with cumulative gains of 526%. But only for those investors that stayed invested.
My duel mandate for you is to protect your money and grow your money, in that order. And the most effective way to achieve this is to ensure you stay invested, so that when markets come back, your portfolio will come back with it. So how do we do this? By including asset classes such as government and corporate bonds in our mutual fund portfolios. When markets tank, they hold up relatively well, giving you just enough confidence to ride out the storm and be there when the clouds part and the sun comes out.