After a rough year-end in 2018, with the S&P 500 declining almost 20% intra-4th quarter, 2019 has been a complete reversal with the S&P 500 positive 21.0% year-to- date. It is easy and natural during these times to get comfortable, relax and take for granted to incredible rise in stock prices over the past 7 plus months. However, the same psychology and human behavior that drives the market up will also drive it down. The fundamentals have changed very little in the past year. Big picture, the economy was strong throughout 2018 (including year end), and the economy is strong now, Interest rates were low in Q4 2018, and they are low now. Unemployment was sub-4% at the end of 2018, and the same is true currently.
On the flip side, the negatives that plague the US and global economy are also still present. Brexit, trade wars, increased tension in the middle east, an uncertain political environment going into 2020. NONE of that has changed. Sometimes the market pays attention to it and a sell off occurs and sometimes it shrugs it off. No one knows consistently what is going to happen in the market, especially over the short-term (Yes, us included!). So what is one to do?
During times like these, when your accounts are positive and volatility is low, it is paramount to reflect and remind yourself of the purpose of your portfolio, and overall financial plan. One example of doing this would be to focus on your time horizon. The first question to ask is 'how long am I going to need this money?' Even if you are in retirement, you may still have a time horizon of 20 years; this means that you have to think about your portfolio lasting over a 20 year period.
The longer your time horizon, generally speaking, stocks can/should comprise a larger portion of your portfolio. Why? Stocks have been one of the best long-term investments; long-term meaning 10+ years. We understand the temptation - it is fun to look at your portfolio when it's going up! But, the reality is that the majority of the upward/downward movement in your portfolio on an annual basis is the result of the stock market moving up and down. This is ironic and misguided because you are trained to judge performance (and how you feel about your wealth) on a short-term basis when the purpose of investing in stocks is to compound your money in the long-term. The results in any given year are irrelevant.
This is why Warren Buffett always says 'when you purchase a stock, you should feel comfortable not looking at the investment for 10 years.' Obviously, that is a bit ambitious, but there is a reason why he is the most successful investor to ever live - he understands time horizon and how it can work in your favor.
So, the lesson: take this opportunity to quietly reflect on the big picture and what is going on in your life now, and where you will likely be in 1, 5 and 10 years. If stockswent down 10%, or even 20% from here, will you be able to put the decline in perspective relative to your long-term goals? If you are not sure, we should and want to speak with you.