Living in New England near the mountains and the ocean helps us understand the beauty and the power of mother nature. New Englanders have always been sustained by our oceans, lakes and rivers and have learned to navigate these waterways in all sorts of weather and conditions. One important lesson we need to constantly relearn is that we can't control or predict how weather will affect our experience on the water and we need to be prepared for anything.
Navigating various waterways during good and bad weather requires different boating strategies so that you can stay afloat and get to your intended destination. In the same way, it takes different investment strategies to navigate the volatility of the financial markets during different periods of time. Let's use two boating strategies that help frame a prudent way to build a portfolio that can help you meet your long-term financial goals.
Sailing with the Wind
When the majority of stocks are going up, it isn't that hard making money in the stock market. During these periods, you would like to have exposure to a broadly diversified basket of stocks like the S&P 500. Using the tailwind of the stock market, you can "sail" along and your portfolio is likely to increase in value, moving you closer to your destination.
There have been plenty of times when the markets have been favorable over a long period of time. The last secular (or long-term) bull market was from 1982 through 2000, when the Dow gained 1,408.9%, an average of 16.48% per year. An investor's goal during these "sailing" markets is to participate in the market surge.
Adjusting Your Sails
If you have a destination in mind, it is often necessary to make small adjustments as you go. A "strategic" investor will allocate assets between different kinds of stocks, bonds, commodities and real estate depending upon how much risk or volatility they are willing to accept within a specific time horizon. Staying on course or "rebalancing" the strategic asset allocation is like adjusting your sails as the winds change.
Rowing Against the Wind
It is hard to meet your travel objective if you are sailing directly into a strong headwind. In order to get to your destination, it may be more effective to change boating strategies and start rowing. In the same way, if the majority of stocks are loosing money, the traditional sailing investment strategies may not work very well and it may be time to utilize a rowing investment strategy.
As we have seen, markets don't always go up. For example, 1966 - 1982 was a secular (or long-term) bear market," when the Dow lost 21.93%, an average loss of 1.49% per year. Some stock market observers suggest that we are in another secular bear market that started in 2000. When you consider the cyclical (or short-term) bear markets of 2000 to 2002 and 2007 to 2009, the last decade hasn't been a particular rewarding experience for many stock investors. An investor's goal during these "rowing" markets is to protect assets, reduce volatility and to experience positive returns.
During secular bear markets, there are always cyclical or short-term periods of time when certain markets or asset classes do very well. A rowing strategy will deploy tactical changes to a portfolio's asset allocation to reduce market risk For example, an appropriate sailing strategy might be 50% stocks and 50% bonds, a rowing strategist might reduce the allocation of stocks to 30% and increase the bond allocation to 70%, if stocks are deemed to be too risky. This tactical adjustment might be helpful if the stock market does poorly, but it may hurt performance if the stock market continues to surge.
Rowing or Sailing
The most appropriate investment strategy for you is one that gives you the best chance of reaching your financial planning goals while taking into account some of the risks inherent in the stock and bond markets. Navigating these volatile markets takes a personalized, prudent and consistent investment philosophy.
Since we cannot predict market performance, portfolios should be positioned to take advantage of both sailing and rowing markets. Choosing the appropriate investment strategy is dependent upon your financial goals, risk tolerance and time horizon. It should be tailored to your personal financial plan. Utilizing both strategic and tactical managers will allow you to build the most suitable portfolio, giving you the highest probability of meeting your goals and reaching your destination.
If you are interested in reviewing an interactive video concerning Sailing and Rowing, please go to the Raskin Planning Group's website page shown below. Copy the link and paste it into your browser.
Sailing and Rowing
Scroll down to the Sailing and Rowing Interactive Video link
We hope you will enjoy exploring the educational tools, reading the investor case studies, learning how past Secular and Cyclical Markets may have an impact on your investing experience, and discover how diversifying asset allocation approaches may help you better achieve your financial goals.
Peter Raskin is a registered representative of Lincoln Financial Advisors Corp.
Securities and advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (Member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies.