By now you may have noticed that both stock and bond markets have been weak and that this may have affected your portfolio. Naturally, you are probably thinking about how to orchestrate a recovery to the higher values you were enjoying before the recent decline in the financial markets. You may also understand the math of a recovery in values. For instance, if your portfolio is down 20%, what’s left has to increase 25% to get back to where you were.
Given this context, it may appear to be a good time to increase your risk profile in an effort to accelerate a recovery in your portfolio. Don’t do it. You probably got to where you are by maintaining a rational, disciplined investment strategy that included understanding your risk tolerance. This is not a good time to change. During a period of strong market returns, overall strength can limit the consequences of an isolated mistake. In weaker, and/or more volatile markets, many investors tend to be more discriminating and bad decisions can be amplified.
This might be a good time for investors, perhaps with the help of their advisor(s), to review their long term objectives and update their risk tolerance. Consider, time and history are on your side. Over the last 100 years markets have always fully recovered from setbacks and gone on to new highs.
Generally speaking, this not a good time to take bigger risks, accept reduced liquidity or venture into unfamiliar areas.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA