Sinking

Imagine this: you are in a car and it is sinking.

You try pulling on the door handles but they won’t open because the pressure on the outside of the car is much greater than the pressure inside the car.  What do you do?  More likely than not, you are now panicking and you can’t think clearly.  If you were thinking clearly, you might remember the driver’s education 101 tip that says stay calm.  If you have patience and wait for the car to fully submerge, the pressure on the inside and outside of the car will be equal and you should be able to open the door.

A similar thing happens in the world of investing.  During times of crisis, our instincts cause us to panic and forget everything we have learned.  When a crisis arises, we tend to take the first action we can think of, even if it is not the best one.  It takes a lot of patience and mental discipline to be able to watch a market dropping without pulling out your cash, but there is a huge difference in your returns if you remain calm.  From November 1, 2015, through February 11, 2016, the global stock market fell about 15% before rallying 31% to today’s level.  If you had sold at this time out of fear, though, you would be up only 4% compared to the 20% cumulative you’d be up if you had remained steady.  

Source: data from Xignite, total returns data for ACWI ETF representing global stock markets, chart from Betterment

 

The best advice you can be given is: understand the level of risk that you are taking in your current portfolio and make sure that you are comfortable taking on that level of risk.  Your risk level is closely tied to your financial plan.  You should ask yourself if you are taking too much or too little risk to accomplish your goals.  Are you saving enough to achieve your goals?  Are you using unreasonable future growth assumptions to accomplish your goals?  If you are honest with yourself and realize you are taking on more risk than you are comfortable with, you should adjust your risk level and financial plan as soon as possible, not as a reactionary measure to a market downturn.  Additionally, regardless of your risk tolerance, everyone should have an emergency fund that is invested conservatively as a fallback.  

If you feel that you are taking a level of risk that you are comfortable with, but are still worried about your own panic getting in the way of your plans – draft a plan now for how you will deal with it.  If you can’t handle seeing the color red, logging into your portfolio every day is probably not recommended. Ask yourself where there is wiggle room in your financial plan.  Prioritizing your goals and figuring out what you would do differently if the need arose is a good way to feel more secure if things are not going well.  

If you think making changes to your portfolio is the right move, make sure get a second opinion from someone with a level-head.  At Sherman Wealth Management, we are committed to answering all of your questions, addressing your concerns and helping you to avoid common behavioral mistakes.  When you imagine yourself in a sinking car, rest assured that we are right there to coach you through it.

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.

I’m New Here

Our summer intern turned part-time associate Dan McKenna wrote a great piece about his experience being new to the biz that I thought was worth sharing.

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I’m new here.  

The best word I can think of for explaining the experience of being a freshly-graduated analyst entering this market is… baffling.  Every week I read the news that markets are hitting new all time highs, that we have shaken off the effects of the global financial crisis and that excellent Q2 earnings reports are the catalyst that will push stocks higher.  There is almost a weekly reminder that markets do not die from old age.  Yesterday, the Dow climbed back above 22000 as investor fears retreated.

On the other hand, every week I also read articles from investors screaming that the end is near, markets cannot possibly keep up with their current pace, P/E ratios are outlandish and we need to be paring back risk.  For example, a month ago, the co-founder and chief executive officer of DoubleLine Capital LP, Jeffrey Gundlach, said that risky assets are overvalued and that investors should be “moving toward the exits.”  Since then, markets have pushed even higher.

No wonder the average client is looking to their advisor with a look of complete confusion and truthfully, a fair amount of fear.  In times like these, the words of my graduate-school mentor (one of the most brilliant finance professionals I know) often ring in my ears.  He always reminded me of a piece of wisdom I want to share with you:

Nobody knows anything in this field.

By that he means… nobody knows for certain what is going to happen.  If we truly did know the future, we’d never have to work again.  We could all leverage up, pick the winners, and make so much money our eyes would glaze over.  But we don’t know the future.  That’s why we spend so much time crafting diversified portfolios and picking the right amount of risk for each individual’s unique tolerance.  Face it: you’re probably not going to achieve your daydream of being the protagonist of The Big Short who calls the financial crisis before it happens.

We have to understand that the difference of opinion is what makes a market exist.  Don’t forget that there is an incremental seller for each and every buyer in the market.  Right when you’re convinced to buy a security, someone else is convinced to sell.  That is just how it works.  

The simplest thing to do is to remain calm and stick to your plan.  At Sherman Wealth Management, we use broad-based financial planning that is designed around your unique risk tolerance and your goals.  Unless it directly affects your financial plan, ignore the noise in the markets and that nagging voice in the back of your mind that screams sell every time you read a negative piece of news.  

I might be new here, but I can predict the future just as well as the next guy.  

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.