Step Away from the Ledge!

Investors sure needed a day off yesterday to gather thoughts and step away from the ledge. It was an awful week as investors were beaten down by an almost continuous flow of bad news. There was almost no place to hide, except government bonds and cash (the two asset classes often shunned when I mention them as alternatives).

Here is a snapshot of the damage: the Standard & Poors 500 Index lost 5.4% on the week at 1325—the broad measure of US stock performance is now off 9.75% for the year. The Dow Jones Industrial Average closed at 12,099, a 4% for the week and down 8.79% for the year. The Dow now stands less than 800 points from a 20% decline of its October 9th record close, the technical definition of a bear market. The NASDAQ composite fell 4.1% on the week to close at 2340, off 11.77% for the year. The tech-heavy index is down 18.2% since its October high. If you are a fan of small stocks, the news is worse: the Russell 2000 Small Cap Index is already technically in a bear market, down 21.3% from its July peak.

These numbers are likely to get you close to the ledge without putting context around them. That’s what I told my client “Betty”, who was concerned about the state of the financial markets and her portfolio value. Betty said that she had lost $75,000 since the beginning of the year, which “is a great deal of money!” I wouldn’t sneeze at $75,000, but I pointed out that the $75K represented a loss of approximately 5% in her growth-oriented $1.5 million portfolio; a pretty good performance when compared to the 9% drubbing the S&P had taken in the same time.

I know—it’s still seventy-five grand, but to be an investor, you must compare how you are doing against the appropriate benchmark. If Betty were down far more than the index, then I would be worried that she had assumed too much risk, but that wasn’t the case. She is a growth investor, who will not need to access her money for at least ten years. (She is also the person who asked me to put her into a more aggressive portfolio a year ago, which I thankfully counseled against!) This of course is the investor’s dilemma: in order to try to earn more money than your local bank CDs, you must be willing to endure these painful times in the market.

I suspect that in the short-term, I will have more of these conversations. I usually remind folks that markets can not possibly move in a straight line. With all of the negativity swirling about, it’s hard not to get caught up in the noise, but if you have a diversified portfolio, you should be able to weather the current market volatility and step away from the ledge.