Three Thoughts During Scary Markets

We have often said that investment risks and expected rewards are related.

Coronavirus-fueled fears, driving economic insecurities, aggravating a host of simmering global sore spots, spiraling into stomach-wrenching market sell-offs…

Be it confirmed. Today’s unfolding news is the realization of those risks we have been talking about all along.

In case you have forgotten – or never experienced – what investment risk feels like, we reach out to you today with three encouraging thoughts, to help you face any challenges ahead.

1. For Real: Risks DO Drive Expected Returns

First, be assured, our advice on how to invest during volatile markets remains the same:

As a train needs its engine to move, markets require risks to drive them onward and upward.

Rather than spending too much time tracking passing headlines or watching every market move, consider reading a good book. For example, there is Ben Carlson’s recently released “Don’t Fall For It: A Short History of Financial Scams.”

Carlson describes how the U.S. stock market (the S&P 500) has delivered a satisfying 9.5% annual return from 1928–2008. But during that time, there were only 3 years when returns hovered tamely between 9%–11%. Usually, annual returns deviated wildly from their norm.

So, yes, markets are risky. But here is the reward to be expected in return: Most years (66 out of 91), steadfast investors earned positive returns, usually in the double-digits. Carlson concluded:

“Every successful investor must understand there is a sacred relationship between risk and reward. There is no proven way to earn a high return on your capital without taking some form of risk nor is it possible to completely extinguish risk from your investments.”

2. Preparation Beats Panic

It is one thing to embrace abstract risk. It is quite another to endure it for real. So, second, remember this:

You have never been more prepared than you are today for whatever happens next.

In other words, if you are worrying that NOW is the time to do something about the markets, consider what we have already been doing all along.

We have already been helping you identify the right balance between your willingness, ability and need to tolerate risks. We have already been working with you to create your own investment plan, with your assets allocated accordingly. We have already been building and managing your evidence-based, globally diversified portfolio to capture the market’s long-term expected returns.

In other words, you are not only already “doing something,” that “something” is expected to remain your best strategy for riding out any bad news to come.

3. In the Face of Market Risks, We’ve Got Your Back

Now that investment risks are being realized, you may also be realizing your risk tolerance is not what you thought it would be. No shame, no blame. How could you have known in theory what your tolerances are for real? If you are second-guessing yourself today, there are two possibilities:

You may be right. You may not be cut out financially and/or emotionally to withstand sustained risks to your investments. If this is the case, let’s revisit your plans, and talk about how to prudently adjust your risk exposures without sacrificing too many of your financial goals.

You may be wrong. It is possible you are experiencing blind spot bias. That is, while we can often see when someone else is succumbing to an ill-advised behavior, such as fear or risk aversion, we often cannot see it when we are experiencing it ourselves. Carlson addressed blind spot bias in his book. He pointed to research that has suggested, even once you know you have a blind spot, you still may not be able to overcome all the damaging biases you are still not seeing.

That is one of the primary reasons you engaged us as your fiduciary financial advisor. If the breaking news is leaving you feeling strained to a breaking point, here’s one fast action we recommend: Please be in touch with us immediately. Together, we will take an objective look at your thoughts, hopes and fears. Together, we’ll continue to chart a sensible course forward.

Come what may in the days to come, we are here for you now.