Volatility is the price investors pay to get rich.
From 1989 through 2018 the Dow Jones Industrial Average (DJIA) generated an average return of 8.3% annually. I think anyone would be happy with these returns. But during those three decades, the DJIA never once had a year where the return was anywhere near that number. There were eight years when that index had losses, one year the loss exceeded 33%. There were 22 years when the DJIA was up. One year the market rose more than 33%, equal to the year of maximum loss. That’s quite a ride.
Every year you can expect the market to experience a significant correction. Since 1980, the S&P 500 has averaged a 14% decline at some point during the calendar year. For many people the ups and downs are terrifying. We all hear of the long-term average annual return over time, but for too many people the roller coaster ride is more than they can handle.
As portfolios grow, the gains – and losses – get bigger in terms of dollars. A $10,000 portfolio losing 14% means the investor is down $1,400. A $500,000 portfolio’s 10% loss is $70,000. At $1 million, that same percentage loss means the investor is down $140,000 from its peak value. If that was your portfolio, how would you feel?
This is where investor psychology becomes critically important. Losing money is never fun but there will be times when – if you invest at all – you will find yourself in this situation. That’s why Registered Investment Advisors (RIAs) like Korving & Co. try to judge their client’s risk tolerance. In order to get the kinds of returns investors can get over the long term, it’s necessary to accept the fact that there will be years when the market goes down.
Investors hiring investment advisors sometimes assume that we can produce high, yet safe, returns. That’s a combination that no one can provide. The only people who offer high returns with no risk are con men. One of our jobs is to warn our clients about how to spot promises that are “too good to be true.”
What a good investment advisor can do is create and monitor portfolios designed to make the bumpy ride a great deal smoother. We create diversified portfolios designed to cushion the downside risk during “Bear” markets. But there is always a tradeoff and that means we must give up some of the upsides during the “Bull” phase of the market. If we do our jobs properly, we will get our client a fair rate of return near their personal growth objectives over the long term.
Investors vary greatly in risk tolerance. We have some great tools, like Riskalyze, a tool used for measuring risk tolerance and with it, we can customize portfolios for nearly every investor. Contact us if you want to find your “risk number” and see if it matches your portfolio. What do you have to lose?
Arie J. Korving, a CERTIFIED FINANCIAL PLANNER™ professional, has been delivering customized wealth management solutions to his clients for more than three decades. Prior to co-founding Korving & Company, he was First Vice President with UBS Wealth Management and held management positions with General Electric.