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October Commentary: Don't Lose Your Balance

I have always been a fan of this quote by Brian Tracy, a business development expert whose teaching have been instrumental to many in the financial industry. Brian says,

Just as your car runs more smoothly and requires less energy to go faster and farther when the wheels are in perfect alignment, you perform better when your thoughts, feelings, emotions, goals, and values are in balance."

No matter what we are talking about, he could not be more right. Balance is an important issue, whether we are talking about parenting, work/life balance, psychological balance or even financial balance.

Earlier this month, the S&P 500 was down 7.4% during a two-week selloff (Bob Veras, Client Article Why Losses Matter, 10-25-2014), and there was no way to know whether we'd have to endure more of the same. Whether it was residual fear from the Great Recession, or the constant media clamoring, panic certainly set in and fast.

What was the result? Well, when the dust settled, staying the course was the right strategy, as is often true over the long term.

Despite those who preached staying the course being able to provide their clients a big "I told you so", there were important lessons that came up during those two weeks that I thought were worth mentioning in this month's commentary. Specifically, how do we, as financial advisors, keep our balance, while helping our clients understand the importance of not succumbing to unnecessary panic. And furthermore, how do we embrace the panic to help us recognize the important markers that portfolios generate to help us understand if they are properly protected against catastrophic losses.

In a downturn, no living person knows when the stock markets will recover, but history tells us that they always do seem to recover and eventually deliver returns that are higher, on average, than the returns you get when the money is safely stored under your mattress. And candidly, that is a core principle of our strategy. But the truth is that we must pay attention to losses because of the asymmetrical effect of loses versus gains in a portfolio. If a $1 million portfolio loses 10%, falling to $900,000, then it requires an 11.11% gain to get it back where you started. It doesn't seem fair, but that's how it is. A 20% loss requires a 25% gain, and if the portfolio were to drop 40%, you'd need a subsequent 66.67% gain to climb back to your original $1 million nest egg.

So what do we do? We include a variety of different types of assets, including bonds, which, against every single market prediction at the start of the year, are actually delivering positive returns almost all the way across the maturity spectrum (Bob Veras, Client Article Why Losses Matter, 10-25-2014). We include foreign stocks, which haven't exactly been knocking the lights out this year, but which will, someday, offer strong gains when the U.S. markets are weakening. All of these different movements tend to have a calming effect on the portfolio's returns, not always in every circumstance, but fairly reliably over time.

The result? A smoother ride puts more money in your pocket. If an investor experienced returns of +20% and -10% in alternate years over the next 20 years, a $1 million portfolio would grow to just under $216,000. If a more diversified investor experienced a smoother ride of 10% a year, her portfolio would grow to just under $673,000. The power of steady compounding is a marvelous thing to see. The drag of losses can be debilitating to a portfolio's growth.

Of course, neither of those trajectories will actually be the case, but if you can somehow avoid the worst of the market's falls, even if it means never beating the market during the up-cycles, you raise your chances of long-term success. If you can do this and remain invested through a lot of uncertainty, like we experienced earlier this month, chances are you'll enjoy better long-term returns than a lot of the "experts" you see screaming at you to buy or sell on the cable finance channels.

So what is the moral of the story? You cannot judge your investment strategy and performance based on the highest of the highs reported in any given period. Balance remains the bedrock of a successful investment portfolio, even though losses are inevitable and sector predictions are guesswork at best. As mentioned earlier, who would have thought that, in our continued low interest rate environment, bonds would be producing some of 2014's best results? Does that mean we should move more into bonds and sacrifice losses in other areas? No. It means we should pay attention to our losses, understand them as compared to the indices they are measured against and make sure that we are not creating an environment where monumental gains are needed to recover losses that are the result of being out of balance.

And for the record, despite the almost 7.4% downturn earlier this month (Bob Veras, Client Article Why Losses Matter, 10-25-2014), the markets continue to hold onto positive gains for the year.

To discuss this in further detail, or to schedule an appointment to review your balance, please email me at

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 Securities offered through American Portfolios Financial Services, Inc. Member FINRA/SIPC (FINRA/SIPC). American Portfolios Financial Services, Inc. and American Portfolios Advisors, Inc. are not affiliated with any other named business entities mentioned.

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