Investment Strategy and Market Volatility

Jan. 7, 2016

"It's déjà all over again" --Yogi Berra

Wait a minute! We used this same quote last August when we sent out a commentary after the Dow Jones Industrial Average had fallen 1,878 points in a week’s time (almost an 11% decline). With the DJIA having dropped 1,206 points in the past week—a 6.81% loss—it is certainly “déjà vu all over again!”

Fortunately the DJIA recovered its dramatic losses of August in just two months. Can we expect to see the same recovery of the declines we are now experiencing? Or should investors sell stocks and raise cash?

We’re confident that investors should expect to see a recovery in the declines of the stock market averages. However, we won’t say that the recovery will happen within two months. It might. And then it might take years. But recover it should.

What did we have to say last August when the Dow Jones Industrial Average fell 1,878 points?

We stated that the market will not decline drastically in value as it did from 2007 through 2009 (over 50%). Problems like the unprecedented amount of structural defects in lending and securitization of unsupportable loans which caused that market crash aren’t as prominent in our economy today.

We also saw the possibility that the markets could decline yet another 5% to 15% because that’s what stock markets routinely do. We discouraged investors from attempting market timing—a strategy of selling stocks to raise cash for a later reinvestment back into stocks. For market timing to succeed, an investor must make two very smart decisions, the second on the heels of the first: when to sell, and more importantly, when to buy back in. It’s not good enough to just get one of these decisions right.

The benefits of market timing are great if one gets it perfect. The negative consequences of getting market timing wrong are significant. And the odds are against pulling it off successfully.

Our advice last August—as it has always been and remains—is to make certain that the mix of stocks, bonds and cash within your portfolio is appropriate for your circumstances and risk tolerance. And if so, ride the market down and then ride it back up.

We also stated that if your asset allocation is too aggressive for your circumstances (meaning the percentage of stocks within your portfolio is too high), then you should reduce your stock allocation to the appropriate level. And if you are underweight stocks, then now might be a good time to start buying more stock in your portfolio.

If you do not like selling stocks during a market decline, we suggested that you could gradually achieve a more appropriate mix of assets by investing future contributions to your portfolio solely in bonds and cash.

We also counseled that consistent and adequate annual savings is as big a factor to achieving a comfortable and secure retirement as getting good investment returns on your investments. If you are still working, keep deferring into your 401(k) regardless of market conditions! Think that you buying stocks “on sale” during market downturns.

Perhaps most important of all, we asked you not to hesitate to call us if you have any questions or concerns about whether the mix of assets within your portfolio is “appropriate”. Distributions from your portfolio needed in the near-term—which we define as within the next 10 years—should be invested in stocks and bonds. Money that you won’t need for 10 years or longer should be invested in stocks.

10 years is a sufficiently long enough period of time to get paid for the risk that stock investing poses in the near-term. Over the past 40 years, a well-diversified stock portfolio only lost money over any ten-year period less than 1% of the time—and the worst 10-year loss was less than 1%.

We stand by comments of this past August.

Call us. Our main number is 503-597-1616.

Heintzberger | Payne Advisors

Jan. 7, 2016

Past performance is no guarantee of future results. This article has been distributed for educational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Opinions are subject to change without notice. Heintzberger | Payne Advisors © 2016