You will soon receive your Dec 31 statement from the investment companies. You may experience a Statement Shock! The numbers are not pretty. Even if you have heard the litany of bad news, it is only when you see your statement that the reality of the steep decline will hit home.
Most will have experience d declines in the 20% to 30% range. The numbers are bad and painful to look at but not as bad as the markets performance. In fact, you have likely lost a lot less than the markets. Why? Because you also hold some bonds and cash. Your whole portfolio is not made of 100% equities. Compare this to the world equity markets:
In the past 13 months, the results were in the range of (see below for details):
Asia – 52%
In the short term, uncertainty from economical or political crisis can create sudden drops in value. For example, the average portfolio would have posted a negative return one month after the October 1987 stock-market crash. Over a longer period of time, however, returns were much more attractive, and investors who stayed the course reaped considerable rewards. Since 1957, the stock market has enjoyed a positive calendar year return in nearly three out of every four years.
Fear and uncertainty might lead investors to sell their investments during tough times, putting downward pressure on prices. I call this self-sabotage. Trading based on these emotions can be detrimental to a portfolio’s value. By selling during downward price pressures, short-term losses are permanently realized. This is compounded as investors would wait and hesitate to get back into the market, possibly missing some or all of the potential recovery. The lesson here is that patience can pay dividends.
Diversification can also limit losses during turbulent market conditions. One of the main advantages of diversification is reducing risk, not necessarily increasing return, over the long run. A diversified portfolio can help reduce extreme swings in value.
Proper asset allocation will ensure that you have enough cash and bonds for short-term needs and let you ride the ups and downs on the equity component of the portfolio.
If you can’t get over the shock of your investment losses, please do call or make an appointment to review your account and your personal asset allocation.