In our practice, we see a common and frankly, worrying, trend. We sit down with smart, successful people, look at their investment portfolios, and realize they’ve built them for a world that doesn’t quite exist.
It’s a portfolio built for a fantasy land where the stock market only ever goes up.
Here’s what it looks like: an investor meets with an advisor, or does their own research, and loads up on the funds that have been on a hot streak for the past few years. The logic seems simple: “It’s been doing well, so it will keep doing well.” They put their money in, and they’re done.
But that’s not investing for reality. It’s chasing the past.
The Two Truths of the Stock Market
To build a resilient portfolio, you have to accept two fundamental truths about the stock market, and you have to hold them in your mind at the same time.
Truth #1: The stock market is, without a doubt, the greatest wealth creation engine ever known to humankind. Over the long term, it has consistently generated returns that have outpaced inflation and built fortunes. We believe in this.
Truth #2: The stock market does not go up in a straight line. It fluctuates. It zigs and zags. Sometimes it goes up, and sometimes it comes down, hard and fast.
Here’s the kicker that ties it all together: No one—not me, not your advisor, not the sharpest-looking pundit on TV—can predict exactly when the market will go up or when it will drop. If they imply that they can, they’re simply being ridiculous.
Because you can’t predict the downturns, you have to prepare for them. Building a portfolio based only on the assumption that the market will go up is like building a house in Florida with no plan for a hurricane. It’s not a matter of if the storm will come, but when.
The Question That Baffles Most Investors
This brings us to the question we ask clients that often stops them in their tracks:
“Can your portfolio handle a major market correction or dip?”
Does your portfolio’s design reflect the amount of fluctuation and temporary loss you can personally deal with?
This is what building for “reality” means. It means acknowledging that downturns are a normal part of the investing journey. Your portfolio has to reflect this fact. A portfolio that causes you to lose sleep and sell at the worst possible time isn’t a good portfolio, no matter how great it’s returns looked on paper last year.
Reality is understanding that your investments will not always go up. They will sometimes come down. Your job isn’t to avoid the downturns—it’s to make sure your financial plan can withstand them.
Take a hard look at your investments. Were they built with only sunny skies in mind? Or are they built to be the sturdy, all-weather vehicle you need to navigate the inevitable storms and still reach your financial destination?
The market doesn’t care about our expectations. We have to build our portfolios to handle this reality.
