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Are We Clear of Financial TurbulenceMonday, April 22nd, 2019 | Mark Bras
The Global Stock Markets have made impressive gains since the end of December. Many investors and forecasters predicted that the market declines, witnessed in 2018, would continue in 2019. Investors focused on Emotion and Fear might have made financial decisions as major as going 100% cash.
To prevent being “out of the market” during times when equities rise in value, following the guidance of an Investment Policy Statement (IPS) should help you maintain discipline and structure during what may appear to be “unexpected” or “unreasonable” market moves.
American Financial Advisors does not have discretion to invest clients’ portfolio “at will” based on emotion or market predictions. We stay committed to an Investment Policy Statement’s asset allocation, creating an investment philosophy based on “Structure and Discipline” not “Fear or Emotion”.
Here are some of the investment philosophies we rely upon when managing clients’ financial assets, whether the markets are in or out of “Financial Turbulence”. We highly recommend viewing current market movements through the prism of the following:
· Focus on what you can control.
Diversification and Asset Allocation are some of the factors you can control. Equity Market Trends, Economic Conditions and Market Sentiment cannot be controlled. To maintain Structure and Discipline it is best to just focus on those factors you can control. An IPS should include a recommended asset allocation, based on factors such as Risk Profile and Time Horizon. If the 2018 Financial Turbulence caused you to loses sleep at night, submit AFA's online Risk Questionnaire at: https://www.afadvisors.com/pilots/ips
· Don’t try to outguess the financial markets.
The financial markets’ pricing mechanism and trading costs work against investors who try to “outsmart” other market participants through either stock picking, market timing or trend following. As evidence, only a small percentage of mutual funds have survived and outperformed their benchmarks over extended time periods.
· Resist chasing past performance.
Past performance provides little valuable guidance in predicting future returns. Just look at Mutual Fund is closures when promoting their “great” past returns, generally including statements such as “Past performance is not indicative of future returns”.
· Let the financial markets work for you.
The financial markets have rewarded long-term investors. Investors provide financial capital because they expect a positive return on this capital, and, historically, the equity and bond markets have provided growth of wealth that has more than offset inflation.
Diversification helps to reduce certain risks of an investment portfolio. A portfolio should contain several asset classes, such as stocks and bonds. Global diversification further broadens the investment universe beyond US borders. Diversification, with the ability to reduce the volatility in the rates of return of a portfolio, does mean that not all components of your portfolio will increase in value at the same time. Diversification means that as some of the asset classes rise, others may fall.
· Avoid market timing.
Market timing (attempting to predict future market direction) is extremely difficult, rarely successful and increases your emotional connection to the financial markets. By holding a globally diversified portfolio, investors are well positioned to seek returns wherever they occur. Certain parts of the portfolio will do well, others may not, but the goal should be to achieve overall portfolio growth to match future financial goals.
· Manage your emotions.
Many investors are not able to separate their emotions from Long Term investing goals. Markets go up and down, generally in an unpredictable manner. Reacting to constantly changing market conditions may lead you to make investment decisions at the worst times.
· Look beyond the media headlines.
Daily market news and commentary will challenge your investment discipline. A 1% move in a market could be described as a “Collapse” or “Explosion to the Upside”. At times the financial media will stir anxiety about the future while at other times they will tempt you to chase the latest investment fad. The main goal of the financial media is not to educate you, it is to increase their “subscription” rate.
Disclaimer: Diversification may not protect a portfolio from investment losses.
Connect with Markus Bras, CFP ®, MBA; Director of Pilot Services at email@example.com
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