by Rob Schulz, CFP®
June 24, 2011
There is a lot of negativity out there and the stock market has reacted with increased volatility. If I were a gambler, I would bet the market will continue it’s downward trend over the course of the summer. But I am not a gambler, especially with other people’s money! Therefore; a more scientific and reasonable approach is necessary.
As I have said before, for those of us trying to attain specific financial goals, investing is not as fun as it is necessary. Without a sound investment strategy, inflation and lack of compounding return will make our goals almost impossible to obtain. The trade-off for long term return is short term volatility. We have to accept the latter in order obtain the former.
Of course, there is a little bit more to portfolio construction than just sitting around and accepting whatever the market throws at us. A sound portfolio is fully diversified to eliminate diversifiable risk and is allocated among asset classes, as well as internationally, to mitigate the effects of a meltdown in a specific sector or region. Scientific research suggests a portfolio that is tilted more towards small cap and value stocks has a better chance of outperforming the market as a whole, so this is a strategy worth using to our advantage.
Finally, bond exposure becomes the key ingredient to reducing the overall portfolio volatility down to an acceptable range. High quality, short to intermediate duration bonds act like a mechanical governor to dampen the effects of large market swings.
A sound investment portfolio is constructed, implemented, and carefully monitored to weather the storms of volatility using proven and well thought out strategies. Making changes based upon guesses as to the direction of the market is like trying to consistently beat the house in Vegas. The good news it we don’t have to beat the house to achieve long term success. Over the course of time the calculated risk we have dialed into the portfolio is designed to provide the return we need to achieve our goals.
Rob Schulz, CFP®
By Rob Schulz