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The world is experiencing an event unlike anything we’ve seen in our lifetime, and there is a lot of uncertainty as things seem to be changing daily. As this pandemic continues to evolve, we’re here to help you address any concerns you may have. In this issue, we address the challenges and opportunities.
Most investors should have three buckets of money for short-term, medium-term, and long-term needs. Each bucket has a different risk classification. Periods like the one we are experiencing today highlight the importance of funding a short-term bucket that is not exposed to as much risk (or at least to the same extent medium- and long-term buckets are exposed to risk).
Investors who have held onto their investments have been more successful than those who time the market. The chart to the right shows how timing the market may lead to missing out on higher returns when compared to leaving funds fully invested. Note that if you were to change paths, you have to find the right timing twice – once when you sell, and a second time when you buy back in.
It is important to recognize that short-term volatility in the stock market is typically driven by the emotions of buyers and sellers. Volatility is a natural occurrence of a marketplace and the price investors pay for the return premium of equities.
We all have different relationships with money and wealth, and during a downturn or high-stress periods, those relationships can be intensified or even altered. During those periods, we may change our decision-making process to be more emotional rather than rational. Trigger events can produce common emotional reactions called “cognitive behavioral errors and biases.”
We are encouraged by how well the combination of diversification, discipline, rebalancing, and tax-loss harvesting have served our clients. While we don’t know what the near-term future holds, we remain committed to the long-term investing tenets which we believe improve the odds of helping our clients achieve their stated goals.