Martin Barraud—Getty Images
By David A. Schneider
October 28, 2014

Don’t let history repeat itself.

You’ve heard that phrase before, likely as a warning to those who might be traveling down the same dangerous path as those before them. But it’s also currently the most important piece of advice I offer to clients.

Recently, I’ve been helping clients rebalance portfolios that have become stock-heavy due to the bull market that’s taken the S&P 500 up 194% since March 2009. With the bull now more than five years long and memories of the financial crisis starting to fade, I’m finding that investors aren’t exactly excited about reducing their stock allocations.

One of my duties as a financial adviser is to encourage my clients to rebalance their portfolios to the levels that we agreed made sense for them given their risk tolerance. In August, however, the S&P 500 topped 2,000 for the first time, giving investors a new boost of confidence.

And although seeing the market at new highs is exciting, let’s not forget that markets can go the other way too. On October 19, 1987, the Dow fell 22.6% in just one day. Applied to current levels, a 22.6% drop would be 3,801 points. During the financial crisis, from October 11, 2007 through March 6, 2009, stocks fell 57%, which would be 9,586 points today. I don’t expect anything that drastic to happen anytime soon, but investors need to remember that bear markets — declines of 20% or more — historically have occurred on average every four-and-a-half to five years.

So even though I’m a big believer in holding stocks for the long run, lately I’ve been making a point to show my clients how portfolios like theirs would’ve performed during previous bear markets, including the crash of 1987 and the financial crisis. I help them understand not just stocks’ growth potential but also the risks associated with achieving that growth.

At times like this I talk about risk for two reasons. First, focusing on risk prevents clients from being caught up in the moment and making choices that they may regret. Second, risk is still very much a reality. Investors are more optimistic these days, but this optimism allows them to be tempted to abandon their rebalancing strategies in order to maintain or increase their exposure to the aggressive side of their portfolios, which reduces the downside protection that rebalancing back to bonds and cash may offer.

No matter how the market performs, I reinforce investment discipline by coaching clients to stick with their investment plans. Past performance is not a guarantee of future returns, but a good way to cut the odds of repeating the history of buying high and later selling low is to rebalance in a disciplined way. For many investors, that could mean reducing stock exposure and adding to bonds — especially at times like this, when our impulse is to do just the opposite.

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David A. Schneider, CFP, is the principal of Schneider Wealth Strategies, a financial services firm based in New York City. Schneider has more than 25 years of experience in the wealth management industry and specializes in the planning needs of business owners, professionals, and affluent individuals. He is a registered representative of Cambridge Investment Research and an investment adviser representative of Cambridge Investment Research Advisors. Schneider is also a member of the Financial Planning Association.

Note: The S&P 500 and the Dow are stock market indices containing the stocks of American large-cap corporations. An index can’t be invested into directly. Asset allocation does not guarantee a profit or protection against loss.

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