Much a like a mariner that plans each detail of a voyage before setting sail, a successful investor must also determine where they want to go, chart a reliable course, carefully monitor progress, and make necessary adjustments to safely arrive at a desired destination. Markets, like the open ocean, are unpredictable. A sound navigation plan and a wise investment strategy are similar in that they must both take advantage of favorable conditions and adequately protect against the storms that will inevitably come.

Managing Emotions in Good and Bad Times

A successful voyage balances preparedness and a mindset for safety with the need for steady progress toward the ultimate destination. Indecision driven by fear or overconfidence driven by ego can leave a sailor off course or stranded following a patch of rough waters. A time of smooth sailing where much progress has been made can lead to complacency and leave a sailor exposed to an unexpected storm. Likewise, investors may find themselves off course following a sharp market downturn or a period of strong returns. Bear markets have long been associated with emotional and sometimes irrational investor behavior. Although natural to feel uncomfortable (maybe even seasick!) during times of market volatility, successful investors have confidence in their plan and in the construction of their portfolio to withstand strong forces during stressful times. The most seasoned investors adjust the set of their sail to take advantage of attractive buying opportunities during these times. With the S&P 500 up more than 200% from its March 2009 low, many market observers are concerned about a potential market correction. As the Morningstar chart below depicts, strong markets of varying duration and magnitude are always followed by downturns that are difficult to time and predict. Like a strong storm that batters an unexpecting sailor, the downturns can be painful for the unprepared. Disciplined rebalancing of a portfolio to a long-term target asset allocation following a period of strong returns or poor returns is akin to resetting the sail of a ship to ensure it is on course to reach its intended destination. 

Staying on Course

Market timing, a common practice among investors with an active strategy, equates to a sailor’s attempt to predict next week’s weather.  While general weather patterns can be anticipated (such as spring always following winter), the severity and duration of short-term weather patterns are nearly impossible to predict until they are upon us.  According to a report in the Wall Street Journal, market timing behavior caused the average investor in stock mutual funds to earn an average of 3.8% a year over the past 30 years -- just one-third of the S&P 500’s annualized 11.1% return during that period.  Like being at sea, earning long-term market returns requires an investor to weather storms and take advantage of tailwinds.  A properly executed plan based on the actions below provides the highest likelihood an investor will arrive at their intended destination despite ever changing conditions:

  • Identifying a long-term asset allocation target that closely aligns with investor risk tolerance, investment objectives, and time horizon
  • Ensuring appropriate diversification both within and among various asset classes
  • Minimizing portfolio costs where possible, including management fees, mutual fund expenses, and transaction costs
  • Managing taxes by locating assets in appropriate accounts and implementing other tax saving strategies
  • Rebalancing to a long-term target asset allocation to maintain the appropriate level of risk in the portfolio

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