What Should Investors Do Now?

Thursday, January 8, 2015 7,770 views

The above video is a classic one hour presentation recorded in late 2008 by Weston Wellington, a Vice President at Dimensional Fund Advisors. During the 2008 market downturn many investors questioned the wisdom of their investment strategy. Weston addresses a number of questions and concerns regarding business conditions, the capital markets, and investor's portfolios. He also explains why he believes a broadly diversified investment strategy has made sense in the past, makes sense today and will continue to make sense in the future. Furthermore, he explains why this strategy provides a strong foundation for an an overall investment plan.

The presentation includes an examination of the following topics, which are consistent with IFA's investment strategy.

  1. Capital Markets: An overview of market equilibrium.
  2. Recessions: How markets compensate investors for taking risk and why risky assets tend to offer higher expected returns.
  3. Forecasting: The difficulty of using forecasting to make portfolio decisions is discussed.
  4. History: A survey of bear markets over the past century finds that investor anxiety and extensive media coverage are not unusual in a market downtown.
  5. Government Intervention: A look at historical stock returns in developed markets explores whether the degree of government intervention in a country offers reliable information about future performance.
  6. Solutions: In light of everything investors experienced in 2008, Weston assesses major investment alternatives and the best strategy for long-term investors.

So, what should investors do now? Nothing may be the right answer. Just sit tight and relax. 

A well-known historical prediction for investors is also humorously vacuous. A young person approached J.P. Morgan and asked with an undertone of desperation for guidance in the stock market. J.P. Morgan looked gravely at his questioner and replied, "I believe the market will fluctuate."

This was what Warren Buffett had to say during 2008. "I have no idea what the stock market's going to do tomorrow or next week or next month or next year. If you own your stocks as an investment—just like you'd own an apartment, house or a farm look at them as a business. If you're going to try to buy and sell them based on news or something your neighbor tells you, you're not going to do well. You will not make money trying to sell stocks daily or weekly. A slow-and-steady course to longer-term gain is the winner."

Investors should remember that volatility is the blood of the market. Volatility refers to price fluctuations in a security, portfolio, or market segment during a fairly short time period—a day, a few weeks, a month, or even a year. Such fluctuations are inevitable and come with the territory. If you are invested for the long term, short term volatility should not be a problem and may even be your friend when rebalancing. Larissa Fernand said it perfectly in this Morningstar article:

"Reactions to volatility are very often emotional. Investors buy and sell on reaction, or rather overreaction, to news and speculation without any significant consideration to long-term returns. Recall the sell-off of not just 2008 but even 2011 when volatility spiked. Now look at where the market is today (year-end 2014). The volatility did not really affect the long-term returns of an investor who assesses risk in terms of long-term failure to meet a pre-determined outcome. Those who ignored the volatility and stayed are better off because of it."

The biggest risk you face as an individual investor is running out of money after you retire, when you no longer have your human capital to draw upon. Failure to achieve your goals as a result of not obtaining the return that you should have received is another way of stating this enormous risk. These are your real risks—not movements up or down in the markets. Look at volatility as a source of opportunity and not something to be afraid of.

IFA's recommendation is that investors establish an investment policy and a financial plan, then invest and relax. 

IFA can help you:

1. Put a financial plan together

2. Invest in a risk appropriate portfolio designed to meet your needs and reach your goals.

3. Monitor, rebalance and tax loss harvest the portfolios as necessary based on the market conditions.

4. Manage your emotions and prevent you from taking actions that you may later come to regret.

If you would like to learn more about our services, please call us at 888-643-3133.

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