Do not press! Here's why...

Do not press! Here's why...

| February 28, 2020

With the markets down about 10% this week... it is likely that some investors are thinking about pressing the "panic button".

That knee-jerk reaction is understandable, but, potentially detrimental to the long term performance of portfolios. To be sure, no one likes to see the markets drop this much, this quickly. However, the realty is that these types of corrections are a normal part of the market's cycle. It should be reassuring to know that over the long-term, the market's trend is clearly up. In contrast, in the short-term, the market's trend is always unpredictable.

At Sovereign, we are comfortable with the market over the long-term and persistently concerned about the direction of the market in the short-term. This is why our financial planning and investment management process focuses on "Time Horizon". Specifically, we look to understand:

1. How much money does someone need

2. When do they need the funds

These data points allow us to construct portfolios with risk / return characteristics that "match" the time horizons for the cash flow needs.

Let's quantify that...

As an example, for portfolios that contain funds that clients need in 5-10 years... we generally keep the equity allocation to about 50%. That is not by chance. Instead, it is our belief that a balanced portfolio has an excellent chance to "heal" itself within 5 years. The chart below shows just that. 

View Chart

So, in lieu of panicking, we believe investors should use these market drops as reminders of the importance of implementing their money management decisions within the context of a thought-out financial plan.

Please do not hesitate to reach out to me if I can provide any additional information or clarity on how these concepts would relate to your own personal situation.

Email Chuck