Audio Version: Let Me Hear It!

Certain stock market indices are inching their way toward historic highs which, depending on your personal situation, may have you worried or excited.  So, this week, we feel compelled to remind you to get a plan in place and keep perspective so that you can mute the noise and stay the course.  If you haven’t already, meet with your financial advisor to discuss these key points:

Portfolio Allocation: Major U.S. stock market indices like the S&P 500 and Dow Jones Industrial dominate the headlines, but, unless your portfolio consists of just the 500 stocks in the S&P or just the 30 stocks in the Dow (and in exactly the same weightings as the index), the headlines will not reflect your reality. It’s likely that your portfolio includes domestic and international stocks, bonds, an allocation to cash, and may also include other investment types like private real estate or hedge funds. Review your portfolio allocation with your advisor to understand the similarities and differences each investment type shares with major indices and corresponding variance in performance.

What It Means to You: Once you have brushed up on the makeup of your portfolio and have assessed your actual performance, evaluate what the performance means to you. Will a 5% decline in value today mean that you have to work longer or spend less, or, is it immaterial? What about a 15% decline? If you are at or nearing retirement (or any other life event that requires distributions from your portfolio), consider using a bucket approach to determine how much you will spend in the short-term, intermediate-term and long-term. Work with your advisor to invest shorter-term funds more conservatively and longer-term funds more aggressively. This can help put investment returns into some context. Maybe the piece of your portfolio that is experiencing the most volatility represents funds you aren’t planning to touch for 10 or more years. In this case, short-term fluctuations are most likely inconsequential over the long-run.

Your Gut: Once you understand what it all means to you, take a step back to see if you are comfortable weathering the storm. Remember, the role of a professional is to make prudent and objective investment decisions. At the same time, your risk tolerance is subjectively personal. If your advisor believes that you can afford the level of volatility in your portfolio but you aren’t sleeping at night, then consider a change. Sticking with an allocation with which you’re not comfortable will likely lead to reactive decisions at the wrong time. One way to ensure a disappointing investment experience is to start out too aggressive, sell when things get uncomfortable and then reinvest more conservatively. It can be like digging a hole with a shovel and covering it back up with a spoon.

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