As investors, when the market challenges our discipline it is important that we remind ourselves of the relationship between investment risk and expected reward. The recent unfolding news highlights the risk side of the relationship.
We have, and always will, exercise a patient stance on navigating tough market environments. Discipline is our friend and patient observation is rewarded. In the spirit of reminding ourselves what is most important and what we have ultimate control over as investors, here are three encouraging thoughts to keep at the forefront of our minds:
1. Risks 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 the passing headlines or watching every market move, consider reading a good book. For example, there’s 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’s the reward to be expected in return: Most years (66 out of 91), unwavering 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’s one thing to embrace abstract risk. It’s 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’re worrying that NOW is the time to do something about the markets, consider what we’ve already been doing all along.
We’ve already been helping you identify the right balance between your willingness, ability, and need to tolerate risks. We’ve already been working with you to create your own investment plan, with your assets allocated accordingly. We’ve already been building and managing your evidence-based, globally diversified portfolio to capture the market’s long-term expected returns.
In other words, you’re 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, some of us may be wondering whether our risk tolerance is still appropriate. If you find yourself second-guessing, keep the following in mind:
It’s very possible to experience “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’re 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’re still not seeing.
That’s one of the primary reasons you’ve engaged us as your fiduciary financial advisor. If the breaking news is leaving you feeling concerned, here’s one prudent action we recommend: Please reach out to us, that’s why we’re here. Together, we’ll take an objective look and continue to chart a sensible course forward.