At any given moment, investors are faced with a multitude of uncertainties. For example, we see geo-political risks both here and abroad; the threat of war with North Korea and the senseless massacre in Las Vegas can shake anybody’s confidence in the market. Storms have destroyed cities in Texas, Florida, the Caribbean and Puerto Rico and it remains unclear how the property damage will impact our economy, our already high debt levels and ability for individuals to bury their dead and rebuild their lives. Health care and tax reform are proving to be more difficult to pass than previously anticipated. With such great uncertainties and stressors around us, one may wonder why the market is hitting all time highs when emotionally; many feel that it should be crashing around us.
Cherophobia is a fear of happiness caused by a belief that when something good happens, something bad must follow. This attitude is also shared by some investors. That is, it seems difficult to enjoy a bull market as market strength is always followed by market weakness over time. Fearing a crash, some investors have chosen to materially reduce or eliminate their equity exposure altogether.
Sigma would counter that a well diversified portfolio consisting of cash, bonds and stocks is the best line of defense against market hiccups. Cash provides instant liquidity; bonds provide a small amount of interest income and capital preservation while stocks provide a small amount of dividend income and the potential for market appreciation over the long-term.
We believe a well defined asset allocation strategy and adherence to rebalancing on a regular basis is the best defense to manage the fear of investing. It takes much of the emotion out of the equation, and allows investors to not feel the need to micro-manage the portfolio and be consumed with worry.
There will always be ups and downs in the market. While it is important to prepare for the “downs”, it is also important to enjoy the “ups”.
All comments and suggestions are welcome.