How to Preserve Long-Term Financial Freedom During Times of Market Volatility [Blog Post]
February 17, 2016 - By: SC&H Group
The following blog post from SC&H Group’s Personal Financial Planning team discusses the benefits of “staying put” with your long-term investments during periods of market volatility.
Market volatility has dominated the headlines year-to-date 2016. During periods of market turbulence, it’s only natural to toy with thoughts of abruptly selling your securities and safely watch events unfold from the sidelines.
We never truly know what the future may hold, but, don’t make the mistake of fleeing your long-term investment strategy to avoid temporary, short-term losses.
Our philosophy? Outlast periods of volatility by “staying put”. That’s right – do nothing at all. Often, the right course of action is to take no action at all, even though this is the exact opposite of what your emotions are telling you to do.
Why stay put? Even a well-diversified, tax-efficient, long-term growth portfolio will stagnate, or even fall in value, from time to time. In fact, a recession has occurred about once every five years since the end of WWII. And, the truth is, the global economy is still growing – even if that growth rate is slower than it was before.
Let’s take a closer look at this reasoning – and why we advocate “staying the course” to preserve your long-term financial freedom. Over the long-term:
- Cash, bank deposits, short-term bonds, and money markets will fail to keep up with inflation, and thus lose their ‘purchasing power’ over time. However, these holdings do play a role in most portfolios as they seek to provide liquidity for near term spending needs.
- High-quality bonds are break-even investments after factoring in inflation and taxes. While they don’t likely generate any real returns, their ability to keep pace with inflation makes them well-suited for intermediate-term cash flow needs for a portfolio (to cover spending needed from the portfolio over the next five years or so).
- Stocks are the only asset class with a chance of providing real returns above inflation and taxes over time. However, stocks are often more volatile investments in the short term. Periodic market pullbacks are normal, and occur far more frequently than most people realize. This is simply the price of admission in order to achieve the long-term rewards of equity investments.
Rather than consider where the market will go tomorrow, it is important to reflect on the overall trajectory – where will the market trend over the next five years, 10 years, and longer? In those longer time frames, we are far more confident and comfortable that the stock markets will deliver returns above inflation.
The critical takeaway? Ignore the “noise”. If your personal financial goals haven’t changed, then why should your portfolio suddenly change?
At SC&H Financial Advisors, we craft financial strategies based on your personalized goals while also keeping volatile times like these in mind. We structure client portfolios to make sure they are appropriately allocated according to your unique needs. Our job is to help you disregard the “noise”, generate long-term investment results, and meet your overall financial objectives.