We have a saying around here: It is always a good time to have a balanced portfolio.

This saying reminds us that even when we are faced with market uncertainties, we have previously put in the work to design our portfolios to weather disappointing markets returns.

Diversification

One method of this portfolio design is diversification. Unsystematic risk, like the regulatory risk of tariffs or the political risk of war, is a type of risk mitigated by diversification. By also owning stocks which are not subject to that risk, we increase diversification and can reduce that risk to the portfolio.

In month-to-month snapshots, diversification dampens both the highs and the lows. While dampening the highs is a necessary side effect, dampening the lows is a large reason why it is good advice. After all, the goal is to support your financial needs, not make the most money.

Diversification is a staple of financial advice. Don’t put all your eggs in one basket because if you drop the basket you won’t have any eggs. In the same way, don’t put all your assets in one company stock, one industry, or one country. If that area doesn’t perform well, you might have jeopardized your financial needs.

Our investment strategy is diversified across the industries, countries, and companies of the world. This dampens the unsystematic risk.

Dedication

Another method of this portfolio design is dedication.

At any given point, it is easy to come up with reasons not to invest. However, history says that we should not listen to those fears. In fact, history suggests the opposite: The lower the market falls, the more important it is to stay invested.

When the market goes down, people like to ask why it is down, and everyone has their favorite reason. In reality though, none of these narratives are right. The market doesn’t follow the logic of our stories.

Instead, stock price is determined by the supply and demand of the free markets through market makers. The value of a stock is simply what people are willing to pay for it that day, and the market goes down when there are more sellers than buyers.

Every day, the market moves with about one third of one percent (0.33% or 0.37%) of shares being traded. In this way, people who buy or sell move the markets significantly. And when even a small crowd of investors decide to act together, the market price can jump rapidly.

Like the whims of the crowd who make it, the stock market is inherently volatile. The stock price is like the tip of a whip being cracked by someone on an escalator. You’ll get dizzy tracking the tip of the whip, but if you take a long-term perspective and watch the escalator, you’ll be able to relax and enjoy the ride.

Don’t Peek

Science tells us that we feel a stress response when we feel unprepared or out of control. If we feel prepared, the same stimulus will produce a challenge response. Challenge responses, unlike stress responses, put us in a place to excel.

No one controls the volatility of the market, but you can cultivate a feeling of preparedness by being a student of the past. To help in this endeavor, we have written a series called “A Guide to the Bear Markets” where we review all the S&P 500 Price Index’s bear markets. As of the publication of this article, that is eleven bear markets:

1. Teddy Bear: The Bear Market of 1957
2. The Kennedy Slide Bear: The Bear Market of 1962
3. Baby Bear: The Bear Market of 1966
4. Double Bottom Bear: The Bear Market of 1970
5. The Golden Bear: The Bear Market of 1973
6. Volker’s Bear: The Bear Market of 1982
7. Black Monday Bear: The Bear Market of 1987
8. The Dot Com Bubble: The Bear Market of 2001
9. Remembering The 2008 Crash as a Financial Planner
10. The S&P 500 Recovered Today from the 2020 COVID Bear Market
11. A Second Dip Turns to Bear Market (June 2022)

We have no crystal ball here at Marotta. We strive to utilize a portfolio strategy that does not require market timing to be successful. We think the contrarian effect of rebalancing on a historically justifiable portfolio gives the best chance of weathering the market ups and downs. We take comfort that studies in the markets suggest that investing funds immediately is typically very advantageous and even the literal worst market timing is better than not investing.

If you sell to cash when the markets go down, it almost never turns out well. It ruins a retirement plan. It impoverishes an otherwise brilliant investment strategy. And it isn’t just the numbers. This is your life. Your financial freedom and financial needs are at stake. Sometimes, you don’t get a second chance to be brave.

Stay the course. The recovery may already be happening. The stock market is a powerful financial asset for those wise enough to remain invested and diversified during all kinds of economic movements.

Photo by Vinay Balraj on Unsplash. Image has been cropped.