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The Dow Dropped, but Don't Drop Out of the Market

Over the last week, the stock market stumbled, finally. This, in spite of the fact that about half of the companies in the S&P 500 reported fourth-quarter results, and roughly 80% have beaten Wall Street’s revenue expectations.*

We were having conversations in our office about some of our friends who may be feeling euphoric, and wanting to invest more money in the market, after its very long trend upward, with almost no stumbles at all.

I wonder, did last week change your thinking?

If you have not yet taken our new “What’s your risk number?” online quiz, please do so. We will get an e-mail and we will schedule an appointment with you and your wealth manager. You’ll see a “speed limit” sign, a summary of your comfort level that is both familiar and informative.

At your appointment, you and your wealth manager may discuss the speed limit of your current investments, and the speed limit with which you are comfortable. Then, most importantly, you will both be able to talk about what speed you need to stay invested, earning average rates of return that beat inflation, and keep your money lasting longer than you do.

J.P. Morgan creates many interesting charts, one of which is summarized below. Over any five-year period, since 1950, a portfolio invested in 50% bonds and 50% stocks has not lost money (1). The returns have varied from as high as 21% to as low as 1% per year (1). Fascinating reading, really, because it might help to stretch our thinking to at least a five-year window.

More importantly, the same information shows returns for portfolios over 20-year periods, in which case the same 50/50 “speed” portfolio ranges between 5% and 14% per year. If, over these time periods, inflation has averaged between 2% and 4%, then the real returns vary between 1% and 12% per year. A fixed income portfolio, net of inflation, may lose value over any of these time periods. By contrast, a pure stock portfolio historically generates steadier (and higher) returns over longer time horizons.

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(1) J.P. Morgan

* Wall Street Journal

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