When a family engages Horizon Wealth Advisors to assist them on their journey in building long-term wealth, an important part of our onboarding process includes a comprehensive investment policy discussion. This collaborative meeting is intended to explain how we invest our clients portfolios and importantly “why” we invest the way that we do. We also want to be sure our clients are comfortable with our agreed upon plan for their investments.
One of our favorite graphs that we cover in this meeting is shown below. It demonstrates the range of historic outcomes in the stock market (represented by the S&P 500) and the bond market (represented by the Bloomberg Barclays Aggregate Bond Index) for various time periods. As you can see, in the short-term, the range of outcomes varies wildly. But as the time periods become longer, the range or returns becomes smaller and smaller. For the last grouping below, representing 20-year returns, there are no negative outcomes.
Source: JPMorgan. This graph is not intended to recommend any investment or investment activity.
The message of this graph should be clear. In order to benefit from the desirable long-term returns you see on the right side of the graph, you have to be willing to tolerate the possibility of wild swings represented by the short-term figures on the left side. A key obstacle to investment success is allowing emotions to interfere with a well reasoned long-term investment strategy. As Schwab market strategist Liz Ann Sonders says “panic is not a strategy.”
When we have our initial investment meeting with our clients, our hope is that they understand that the market is volatile at times and the best strategy when volatility occurs is to patiently ride it out and focus on the long-term. But we’ve learned that this belief may be challenged when we experience a period of negative returns, like we have recently. This is especially true if newer investors are experiencing their first episode of severe volatility.
It is not possible to control or predict what happens in the market in the short-term. So, our approach is to focus on what we can control. We spend a lot of time understanding our clients’ goals and objectives, helping them develop a plan to save and prepare for the future, and investing their portfolios in a way that is tailored to their unique circumstances and time horizon. We rebalance when market conditions warrant and position our client’s portfolios to minimize taxes and maximize after-tax returns. We diversify across many different asset classes and economic sectors, keeping close tabs on the funds we use to implement our portfolios. And importantly, in times like these, we attempt to help our clients remain calm when markets become choppy, reminding them to focus on their long-term financial goals, and worry less about the inevitable short-term ups and downs.
Our investment philosophy is not unique or radical in any way. It is informed by the teachings of some of the most respected thought leaders in the investment industry as well as decades of experience and training. We’d like to also point out that our own personal portfolios and retirement accounts are invested in exactly the same fashion as our clients. We believe whole-heartedly in “eating our own cooking.”
We’ve learned that the concept of market volatility is quite different from the reality of a bear market. So, if you’d like to discuss any concerns you have, we are happy to be a sounding board. But, know in advance that we will always focus on your goals and long-term success. We are quite convinced that to be successful in achieving your long-term financial goals, patience is required (and rewarded) when faced with uncomfortable market volatility.
Thank you very much for your continued confidence in our service and advice. If you would like to discuss our opinions, outlook, or your portfolio in greater detail, we would be happy to schedule a meeting or a conference call at your convenience. Lastly, don’t keep us a secret. If you know someone who is worried about their future and in need of financial advice, we will be pleased to speak with them to see if we can help.