There are two ways to look at the market's downward-sloping behavior during the past couple of days, as market players were apparently spooked by Federal Reserve Chairman Ben Bernanke's comments about winding down the Fed's bond-buying program.

 

Door Number One - Emotions: Your first choice is to view it through the filter of the very natural emotions that all those red lines and minus signs evoke deep in the base of your brain. These emotions are well-documented and beyond our power to control. As described by Jason Zweig, Wall Street Journal columnist and author of Your Money and Your Brain:

 

There's not much difference in the brain between having a rattlesnake slither across your living room carpet and having some stock you own [or bonds, we might add] go down 40 or 50 percent. Basically it's the same response, which is, 'I'm in trouble; how do I get out of here alive?' It's incredibly rapid.

 

Door Number Two - Reason:  So you can succumb to emotion, or you can take a deep breath, put those emotions on pause, and recognize current events for what they are.  We know.  It hurts and it's hard.  Our own money (our personal investments and the Align 401K plan) is invested in the same investments owned by our clients.  

 

But, with reason as your guide, as scary as the numbers may be, they also serve as an excellent, real-life illustration of a message we've shared many times before: Withstanding market risk when it actually appears is much easier said than done.  And yet, withstand the risk we must do - together - because it's exactly this type of market risk that we have deliberately built into your portfolio, globally diversified among stocks and bonds alike, in pursuit of achieving the expected returns defined within your personal Investment Policy Statement. Lose sight of that, and you're abandoning your carefully crafted, knowledge-based plans in reaction to random information du jour.

 

To quote financial author and CBS MoneyWatch columnist Larry Swedroe: "When it comes to investing, there's a major difference between information and knowledge. Information is a fact, data, or an opinion held by someone. On the other hand, knowledge is information of value."

 

Given the never-ending deluge of financial news, this is no small question. Pick any day (including the past few), throw a dart at the current events, and you will hit information that may seem important.  Sometimes it tempts you to jump on a fast-moving band wagon, lest you miss out on promising profits. Other times, such as now, a gloomy outlook may frighten you into losing your resolve. Either way, the implication is that you can improve on your outcomes by taking advantage of the information.

 

There are several problems with this logic. 

1. By the time you're aware of good or bad news, the rest of the market knows it too, and already has incorporated it into existing prices.
2. It's unexpected news that alters future pricing, and by definition, the unexpected is impossible to predict.
3. Any trades, whether they work or not, cost real money.

Rather than try to play an expensive game over which you have little control, a better way to position your life savings is according to market factors that you can control, such as: 

1. Minimizing costs
2. Forming an investment plan to guide your way - and sticking with it
3. Capturing returns available by participating in expected long-term market growth
4. Maintaining diversified holdings to dampen market risks

When you read dire predictions of impending doom (i.e., market risk), we advise you to rely on planning and diversification to carry you through that risk. Likewise, when you read forecasts about happy days ahead, you can feel confident that your portfolio already is positioned to cost-effectively capture a portion of those gains commensurate with your goals.

 

We understand if today's information is causing concern, and we're certainly not predicting or promising any particular outcome. (Our crystal ball is as fuzzy as yours ... and anyone who claims otherwise is to be viewed with suspicion.)  But in the face of uncertainty, we hope you'll stick to your long-range plans.  If we can help you further analyze current market conditions, or review & clarify your own investment plans, please let us know. We are here for you, as always.

We know that strong client relationships are born out of exceptional efforts based on an accurate understanding of your unique goals & circumstances.  We provide customized solutions and wealth management services to a discerning clientele.  Once you become a client, your goals become our goals.  Working with us is like having your own personal CFO.