Is your portfolio at risk in today’s bull market? The numbers tell the story

The Dow rolled past 23,000 last week for the first time in history, creating yet another milestone for a bull market that just keeps going… and going… and going. And while the seemingly never-ending market highs have some investors jumping for joy, not everyone is feeling so carefree. That’s especially true for investors who still remember the sting of the crash in 2008. It can make even the most experienced investor wonder if now is the time to change course, taking equity gains and shifting into the safety of fixed income investments. If you’re worried about risk today, here’s something that may surprise you even more than the market itself: the biggest risk in the bull market isn’t the high price of equities—it’s you.

I can say that with confidence because I’ve witnessed that risk firsthand. I began my career as a financial advisor in August of 2008, right when the markets were in a downward spiral. What a time to come into the business! And yet as difficult as it was, my experiences helping clients through the crash and into the recovery that followed had an important impact on my approach today. Best of all, it helped me realize the dramatic effect of investor emotions and behavior on long-term outcomes.

That first job of mine was at a firm that believed in active portfolio management, meaning that they chased market returns by allocating—and reallocating—with every shift in the market. Just like most strategies, theirs worked great as long as the market was up. But when the market crashed, they scrambled to hedge the downside risk. As a result, they were positioned on the wrong side and weren’t able to take full advantage of rising stock prices as the market slowly but surely recovered. Across the board, the losers in 2008 were those who tried to hedge and reallocate and second-guess the market, or worse yet, panicked and pulled out of the market when it was at rock bottom.

It may sound strange, but investors face a similar challenge of keeping a cool head in today’s market. For years, the media has been predicting an end to the current bull market with every major event. The Flash Crash in 2010. The Taper Tantrum in 2013. The Oil Recession in 2015. The Brexit vote. The election of Donald Trump. The list goes on. And while there have been a few blips and dips along the way, the market has been on a steady trajectory skyward.

With the market at record highs, it’s easy to think that taking your gains now and getting out before the market takes a turn (and yes, it will take that turn eventually) will cut risk. But a quick look at the three biggest determiners of investment outcomes—the math, the market, and your existing financial plan—paints a very different picture of risk.

The Math

No matter what your age, the math is on your side. Just look at the facts. The average inner-year decline of the S&P 500 is 14.1% a year. Those declines can feel daunting, but they are much easier to stomach if you note that the market has delivered annual positive returns for 28 out of 37 years since 1980.^[1] Consider this: despite three major crashes—the dot-com bubble in 2000, 9/11, and the financial crisis in 2008—over the 20 years from 1996 through 2015, the S&P 500 returned 8.2%. That means that if you’d invested $100,000 investment in the S&P 500 on January 1, 1996, that investment would have compounded to $483,666 by the end of 2015. The math gets even better. Since the current bull market began on March of 2009, the S&P has risen from just 676 to around 2,500 today—turning a $100,000 investment into just under $285,000 in just over 8 years. That’s some pretty nice math!

The Market

With every new event, the media loves to grab the spotlight by saying that “it’s different this time.” In reality, history has shown that the market is quite predictable. Over the long term, stocks and equities are far less risky than the media would have you believe. Even after the most dramatic downturns and sustained bear markets, the market run-ups that follow typically far outpace the declines. The result: despite the inevitable downturns, the average return for the S&P 500 since its inception back in 1928 is about 10%. That’s concrete evidence of the power of the capital market.

Source: Compustat, FactSet, Thomson Reuters, Federal Reserve, Standard & Poor’s, J.P. Morgan Asset Management

The Planning Process

If you’ve gone through the financial planning process with our team,  you know that the asset allocation for your portfolio is determined by your long-term financial goals and your personal risk tolerance. If neither of those things has changed, why would you change your strategy? While it may feel ‘safe’ to shift to a fixed-income portfolio to try to protect your portfolio from a downturn, doing so would also isolate your portfolio from the upturn that, in all probability, is just around the corner.

Today’s high equity prices aren’t creating risk to your portfolio. Your biggest risk is, indeed, you.

Investors who react to market extremes and deviate from a carefully constructed investment strategy are in essence trying to time the market—an approach that even Warren Buffet, possibly the most successful investor in history, says is a losing battle. That’s precisely why it is vital to have a sound, trusted financial plan in place based on your personal risk tolerance and long-term investment objectives—no matter what’s happening with the markets in the moment.

If you’re still worried about risk in today’s market, please reach out. I’m happy to walk you through the numbers in more detail and help you make a decision that fits your own risk tolerance and your personal financial goals.