Investors should remember ‘the market’ is not their portfolio

By: 
Adam Cufr

        Have you ever gone to a family reunion and thought to yourself, “Boy, I’m not like these people. I mean, I can’t be!”             However, when a passerby looks into the room, they’re thinking that you look exactly like one of those people.          Well, if you’re convinced that simply resembling your family members doesn’t mean that you’re exactly like them, then you probably have what it takes to be a solid investor in the financial markets. Wait, what?
        Oftentimes, I’ll hear from people who see the rise or fall of “the market” and wonder why their portfolio isn’t responding in lockstep. This typically happens when the market is up and their investments aren’t up nearly as much as the market.
        “Why am I not doing as well as the market?” they’ll ask. The short answer is, the market is not your portfolio. Because of this, you’re not going to see all of the upside of the market; you’re also not going to see all of the downside of the market when it declines. This is by design.
        When a person or a couple chooses to invest in stocks or bonds in the financial markets, they’re doing so in order to meet certain objectives. Whether it’s to be able to retire someday, to stay retired or to save for another need or want, the ideal outcome of the investing experience is to be able to satisfy that stated objective. This goals-based investing process very often benefits from diversification – a mixing of asset types, style and duration, in order to match one’s need and the timeline in mind.
        This is how an investor might choose a 60/40 portfolio, as an example. By mixing 60% of the portfolio in stocks and 40% in bonds, they can achieve a risk-to-reward relationship that allows them to meet their objective with the highest probability possible in an unpredictable and volatile world. This 60/40 mix achieves a balanced approach for them that hits an objective-based sweet spot. A person with a different objective will – or should anyway – arrive at a different mix of investments in their portfolio.
        It’s important to point out that a person with a very long time horizon with which to meet their investing objective should, in theory at least, invest in 100% stocks. Why? Over very long periods of time, stocks outperform bonds, annuities and cash. But once the investing timeline for meeting the objective becomes shorter than forever, then the investor should likely reduce the percentage of stocks and increase the percentage of less volatile investments. Why is this so important to point out? If a person is measuring their portfolio against “the market,” then they’re comparing their shorter time horizon and lower risk tolerance to that of a 100% stock mix that is “the market.” So, when a person is disappointed that their portfolio is not keeping pace with the stock market, they’ve forgotten that they have a shorter timeline to meet their investing objective than forever. It truly is an apples-to-oranges comparison.        During periods of time when the stock market is doing really well, we all become at risk of getting greedy. We all do; it’s our nature.
        On flip side, when the stock market appears to be performing poorly, we all become at risk of becoming fearful. Again, it’s our nature.
        The key, it turns out, is to anticipate these swings in market values and emotion and invest our portfolio in a way that allows us to meet our stated objective, with no (or less) emotion. Easier said than done.
        Investing in the market is easy – until times get tough, then it becomes really challenging to stay the course. The best remedy to falling prey to our emotions when investing is to do a few things: invest commensurate with our stated objective and time horizon, beware getting caught up in the frenzy and noise of the financial media, and remember that your portfolio resembling “the market” doesn’t make it the same as the market any more than you resembling your family makes you exactly like them.
        Adam Cufr, RICP®, a Northwood native, is the owner of Fourth Dimension Financial Group, LLC in Perrysburg. He is a retirement planner, a dad to six daughters, and the author of “Off the Record – Secrets to Building a Successful Retirement and a Lasting Legacy” and “Here, I Made This For You.” Have questions for Adam? Schedule a conversation at hfourthdimensionfinancial.com.

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