Why We Must Stick to a Plan When Financial Markets Seem Uncertain

map on table couple making a plan

As 2016 has unfolded, investors are faced with increasing volatility and a US stock market that is officially in a correction.  The relentless media coverage seems intent on making investors doubt that a long-term investment plan will continue to work.

Carl Richards, who is a financial planner and the writer for The New York Times’ Sketch Guy column, describes an important behavioral finance concept in his article Accepting the Uncertainty of our Financial Life.

Mr. Richards describes the behavioral tendency of people to accept a negative certainty rather than remain in a state of uncertainty for a period of time. This tendency is what drives investors to sell low and buy high, a proven method for eroding an investment portfolio.

Many of our clients worked with us through the financial crisis in 2008-2009, and watched their long-term investment plan work to provide retirement cash flow without selling equities into stock market weakness. That was a severe situation, and we do not believe we are on the verge of another recession. However, that difficult time stands as an example of the value of adhering to a broad, globally diversified investment portfolio as the best way to weather this turbulence. Focusing on a variety of quality investments and avoiding emotional trading decisions are key factors to long-term success.

Each client has a personalized Investment Policy Statement (IPS) that defines their goals and outlines how the portfolio will be invested to give them the greatest opportunity to achieve their goals.  The IPS states the percentage of the portfolio that will be invested in equities (stocks and stock mutual funds or exchange traded funds (ETFs)), and the percentage of those equities that will be invested in domestic, international and emerging markets.  It also states the percentage of the portfolio that will be invested in fixed income (bonds and bond mutual funds or ETFs).  These percentages are given in ranges, for example 60%-70% in equities.  A range allows Laurel Tree Advisors some investment flexibility based on current market conditions and longer-term forecasts.

Periodically, we maintain portfolios within the target equity allocation range. During times of increased volatility, we review portfolios and may make some additional moves where appropriate to ensure that all client portfolios are in line with the personalized Investment Policy Statement, and positioned to be able to withstand short-term market corrections without losing track of long-term goals.

We don’t want to let the fear of uncertainty drive us to emotional decisions to lock in a negative certainty that could have long-lasting effects on our plan.  Laurel Tree Advisors follows the news daily and communicates frequently to clients about what we are doing to stay in line with their personalized financial plans. Most of our time is spent reading the news, reviewing client portfolios and communicating via emails, phone calls and meetings to demonstrate how each personalized investment strategy is designed to withstand these challenges.