As you know, the stock market has been quite volatile the last couple of months with fluctuations in the Dow Jones Industrial Average frequently in the hundreds of points a day. There have even been days where the cumulative movement of the index hit 1,000 points! This causes many people to become fearful that their savings are at risk and they choose to exit the market in favor of investing in money market funds or bank CDs. Is this a bad idea and, if so, why?
The lesson we learned many years ago from Dr. Harry Markowitz — professor of finance at Rady School of Management at the University of California, San Diego and creator of Modern Portfolio Theory (for which he won the Nobel Prize in Economic Sciences) — is that a portfolio of highly diversified investments will outperform almost any other investment strategy over time. He considered the term portfolio to include all classes of assets such as stocks and bonds, mutual funds, options, annuities, money market funds, traded and non-traded CDs, REITs and real estate, collectibles and anything else of value held for investment purposes.
The idea behind his theory, which was proved through empirical research, is that the value of any one investment is constantly changing so the more diversified your investments, the greater likelihood that some will be increasing in value at the same time as some are declining. So, owning some money market funds or bank CDs is a good example of counterbalancing the risks associated with market investments. But putting all your eggs in either basket isn’t the way to maximize your returns over time.
That is a particularly important lesson when we’re coming off a year when the stock market lost money as it did in 2018 (the S&P 500 Index lost 6.2 percent for the year before accounting for dividends and about 4.8 percent net of dividends). Many people react to a loss, or the current increased volatility we have seen recently, by exiting the market entirely in favor of less volatile investments.
The problem comes when they don’t reengage the markets once the tremors have subsided. I’ve met with many people in recent years that exited the market during 2008-2009 and never reinvested. As a result, they never recouped the losses they incurred during that period and missed out on the greatest bull market we’ve experienced in our lifetimes.
With all this in mind, what is the best course of action now given the market’s recent turmoil? There are many theories as to whether we are on the cusp of a recession or just reacting to the news of the day.
A few weeks ago, I read an article on msn.com regarding money, savings and investing going forward into 2019 (www.msn.com/en-us/money/savingandinvesting) suggesting several reasons to believe that 2019 will be a recovery year for the markets, albeit it less robust than some recent years of double-digit increases. I agree with their argument but with one difference — no one can predict the future with certainty, so the best way to guard against experiencing a large loss is to be adequately diversified. You can thank Harry Markowitz for that idea.
Frederic “Ric” Schilling is a Florida native, born in Jacksonville, Fl. Ric is President of Senior Guardians of America, a local North Florida firm specializing in tax reduction, long term illness planning, asset protection, probate avoidance and life income planning. Ric is a National Speaker and Advocate on Senior Issues and has been featured by the Florida Times Union and WJXT, TV-4 in Jacksonville as an authority on Estate Planning and Retirement Issues. Senior Guardians has an A+ rating with the Better Business Bureau and is a member in excellent standing with the National Ethics Association. Contact Frederic: 904-371-3302 or 888-891-3381 Please visit: www.seniorguardian.com
This article is not intended to give tax or legal advice. Securities offered through Center Street Securities, Inc. (CSS), a registered Broker-Dealer & member FINRA & SIPC. Investment Advisory Services offered through Center Street Advisors, Inc. (CSA), a SEC Registered Investment Advisor. Schilling and Associates (d/b/a Senior Guardians of America) and CSA are independent of CSS.
