We’ve been through a lot of different market cycles. Some smooth, some rocky, some that have taken off like rocket ships, and a few that really made folks nervous.
I still remember the market crash of 1987. I was still early in my career. In October of that year, the market took a massive dive. It was full-on, what was to be an historic crash. You could feel the fear in the air.
That moment reinforced how I think about investment portfolios. It strengthened my belief in something we still talk about a lot with our clients today: the all-weather portfolio. If your retirement plan relies on the markets being up every year, you don’t have a great retirement plan. A good portfolio - and a good plan - is designed to smooth out the bumps so that the dips aren’t as pronounced and you can stay in it comfortably regardless of market gyrations.
Diversification is Crucial
Markets are going to have ups and downs over time. That’s just what they do, and when they move sharply down it’s only natural for people to feel unsettled. (We rarely hear complaints when markets move sharply up.) How you experience these moves as an investor often comes down to how you’re invested.
An all-weather portfolio is built to handle different kinds of environments. Stocks may be struggling, but other areas, such as bonds and alternative assets, might be struggling less or even going up.
That kind of diversification helps not just in terms of your portfolio’s performance, but also in how you feel and act as an investor. If every piece of your portfolio is in stocks and they start falling at the same time, panic may set in.
Avoid the “Sell Everything” Moment
That’s why panic selling happens. It’s the desire to stop feeling the pain and fear brought on by major investment losses. I’ve spent a long time in this business, and I’d put it this way: we don’t want people to get shocked and bail out of everything in fear at exactly the wrong time. That’s an emotional decision; it’s what we’re trying to avoid.
If you’ve got a portfolio where not everything is dropping and some part is holding firm, you’re much more likely to take a breath and not make a decision you’ll regret. That’s why diversification isn’t just about the money.
Give it Some Time
After you’ve lived through enough of these markets, you start to understand how they work, and more importantly, their proclivity to recover. I’ve had clients who were doctors, surgeons, and people in incredibly high-stress roles ask me, “How do you handle the pressure?”
The answer is: I’ve seen what happens when people stay steady. More times than I can count. The markets have a track record of coming back, and often, they come back faster than anyone expects.
A Final Word
No portfolio can avoid risk altogether - some degree of risk is inherent to investing - but it can be built to take a more modest temporary hit and keep going. That’s the idea behind an all-weather portfolio. It provides you the peace of mind to stay invested even when things feel uncertain.
If you’ve ever felt like a market drop left you shaken, you’re not alone, but there is a way to plan for that. That’s what this approach is all about.
If you ever want to discuss portfolio construction to better understand what happens when (not if) there’s a market dip, we welcome the conversation.