• Susan Spraker, Ph.D., CFP®

If You Remember Only These 5 Things

First and foremost, considering all the unusual turmoil in our lives the past year, we thank you for the trust you have placed both in the firm and in each one of us individually. We take very seriously your confidence in our management of your portfolio as well as our guidance with your financial decisions, through easy times and especially these tough ones.


One of the many upsetting jolts last year was the severe stock market meltdown that accompanied the global business shutdown to slow the pandemic spread. From an investing standpoint, we had yet another opportunity to witness that success in the markets is a function of 5 factors:


Goals: Knowing and keeping in the forefront of our minds the purpose of our portfolio is critical. Is it for only a long-term goal: retirement? Is it a mid-term goal: to buy land/build a home in the next 5-10 years? Is it for both? Is it for multiple mid-term and long-term goals: college education funding, retirement, as well as leaving an inheritance for children? Is it for an immediate as well as long-term need: current retirement income? Is it to leave a legacy? Being very clear about the reason the portfolio is invested is the only way to know how much needs to be invested for how long and at what average rate of return. Eric has written a brief but thoughtful Financial Planning column on this topic.


Time: The goals of the portfolio determine how long the money will be invested. For retirement, the number of years is the estimated remainder of your life. For college education funding, it is the number of years until the person graduates with the final degree to be funded. For easy math, if the portfolio is for retirement and current age is 50, the portfolio will be invested possibly 40 years or more. The magnitude of importance of knowing this number cannot be overemphasized because long term investing can and should ignore the inevitable ups and downs, however large, in all the in-between years. Last year is a great example of why it is critical to ignore the swings. Look at the returns for last year in the table on p.4. Despite the eye-popping drop in March, annual returns were excellent, including in bonds. THESE 2020 ALL-TIME STOCK MARKET HIGHS PLUNGING INTO A DRAMATIC DECLINE FOLLOWED BY DRAMATIC RECOVERY IS A REPEAT OF 2008-2009. Markets are volatile and it pays to ignore it all, keeping eyes focused on the number of years the portfolio will be invested, not the number of days or months it is in a decline. In fact, these times of downturn are inevitably the best opportunities to add more to the portfolio. It’s always a good time to buy stock when prices are drastically reduced.


Risk Tolerance: Investing is very different from saving in that investing involves being a participant in a market whose prices move up and down on a daily basis. Knowing how well you can ignore market movements is crucial to successful nest egg building. In fact, market volatility is an opportunity to take advantage of “sales,” whereas savings has no such sale pricing. However, we must know our risk tolerance to be successful. It can be measured, both by recognizing how upsetting are price movements (volatility) that include portfolio value declines, as well as by knowing how upsetting is trying to time a market that cannot be timed. Which is more upsetting: being in the market when it is down or not being in the market when it has gone up? Selling when prices are down is not as hard as buying back when the prices are higher than when sold. Buying when prices are down, regardless how low, to build nest eggs is a key investing lesson. Think about referring to the 2008-2009 and 2020 stock market price charts when you get scared.


Understanding the System: Systems exist around the world, both fiscal and monetary, to keep economies steady. As long as an economy is growing long-term, as long as companies have earnings, owning part of those growing companies through their stocks is a way to create nest eggs from more than just our own earned income. The 2020 Pandemic witnessed central banks around the world flooding the systems with money so that financial markets would not tighten or collapse. Many lessons learned during the 2008-2009 global credit crisis led to even bigger and swifter monetary relief during the Pandemic. Thereafter, it was followed by bold fiscal stimulus and relief packages as unemployment soared when businesses closed. These actions lasted throughout the rest of the year. Understanding what systems exist and how they work to prevent economic catastrophe is crucial to believing in the long-term viability of markets and the importance of staying put if early knowledge was not clear enough to sell before a downturn. Once in a downturn, we again have seen it’s a great time to buy. A full 96% of our clients stuck to their model allocations during the 2020 pandemic collapse. That is a huge indication that remembering how global economic systems work helps us stay put in a downturn, and add more if possible, to come out better on the other side. After all, how many years will our portfolio be invested?


Patience: Knowing the goals of the portfolio, how many years the portfolio will have to exist for those goals to be met, and understanding how all the systems work to prevent “catastrophes” leads to patience. This year, I highly recommend reviewing with us your portfolio goals and the portfolio timeline. A financial plan illustrates this with your chances of success, which is addressed this quarter in the Financial Planning Corner of the Commentary. Also, discuss again with us your risk tolerance. Is your risk level that we measured last year accurate now that you have again witnessed that markets that drop, however hard, however quickly, do recover? Finally, review the monetary and fiscal tools that keep our economies running as smoothly as possible. This is thoughtfully summarized each quarter in John’s column.

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