The year 2016 has opened with great volatility in the markets. This, combined with the constant (and often conflicting) headlines and sound bites that bombard us through the media can cause an investor to become fearful, lose their nerve. and even panic. This leads to ill-conceived
trading; buying and selling simply to do
something. Here's how
Warren Buffett put it on one occasion:
Those people who can sit quietly for decades when they own a farm or apartment house too often become frenetic when they are exposed to a stream of stock quotations and accompanying commentators delivering an implied message of “Don’t just sit there, do something.” For these investors, liquidity is transformed from the unqualified benefit it should be to a curse.
In contrast, if one is an
investor, some measure of volatility inevitably comes with this. The key is to find your own comfort level with volatility and risk, and then behave in a disciplined manner.
For a quick graphic representation of this, take a look at the two following pictures.
The first is the YTD performance of the
Vanguard implementation of The ETF Monkey 2016 Model Portfolio, as compared against the Dow Jones, S&P 500, and Nasdaq indexes. (Note: You can click on any picture to enlarge it.)
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| ETF Monkey 2016 Model Portfolio vs. Selected Indexes |
You will note that, while the decline in value of this portfolio is not as severe as any of the major averages, the fact is that it is still down roughly 7.5% YTD.
This second picture represents the YTD performance of
The ETF Monkey 2016 Retirement Portfolio against the same indexes.
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| ETF Monkey 2016 Retirement Portfolio vs. Selected Indexes |
Note that the blue line, while down, has a smoother trajectory than the first portfolio. This portfolio is only down approximately 5% YTD. Of course, in a rising market, this version will likely underperform the first one.
You can peruse the linked articles if you are interested in the differences between the two portfolios. For purposes of this article, the point is simply this. If you are an
investor, not a
trader, pick a level of risk that you are comfortable with and stay the course.
Rebalance the portfolio on a regular basis, selling the asset classes that have appreciated in relative terms and purchasing those that have underperformed.
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Disclosure: I am not a registered investment advisor or broker/dealer. Readers are cautioned that the material contained herein should be used solely for informational purposes, and are encouraged to consult with their financial and/or tax advisor respecting the applicability of this information to their personal circumstances. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.
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