Behavior Is Going To Matter


For the first time in seemingly a long time, we were reminded that markets do, in fact, fluctuate.  [i]

DOW last week price action.JPG

Although we closed the week up 2.36 percent, we had a dramatic downswing this past Friday when the DOW Jones Industrial Average fell 300 points during the trading session.  Luckily, the DOW rallied back and closed the trading session down only 41 points.  [i] As investors, after moments like this, it is always good to do a quick “gut check.”

As valuations are on the higher end of the spectrum, you may expect to see more moves similar to the one on Friday. [ii]


Make no mistake; investor behavior has always played a part in returns.  You can see from the data provided by JP Morgan Asset Management, which the average investor significantly underperforms both the S&P 500 as well as returns provided by a balanced 60/40 or 40/60 portfolio.  The simple act of buying and selling creates significant drag, not to mention any tax consequences that may arise in certain circumstances.  [ii]

20 year returns by asset class.JPG

In my opinion, as we see volatility make its way back into the market, investors should ground themselves using two basic rules:

Rule #1: Time Shapes Risk

If an investor owns a diversified basket of stocks, bonds, or a balanced portfolio for enough time, the risk or downside deviation tends to decrease.  [ii]

Total returns over time.JPG

I am not suggesting that an investor needs to own an asset for twenty-years, but I am suggesting that any equity exposure in your portfolio should be viewed as a longer-term position.  If time is not on your side, I recommend potentially looking at other asset classes and discussing your individual circumstances with a financial professional.

Rule #2: Time In The Market Matters More Than Timing The Market

Equity markets tend to move in brief bursts.  Missing out on just a few key days can have lasting impacts on the growth of your portfolio. [iii]

missing trading days.JPG

We know that valuations are high.  We know that we’re likely very long in the economic expansion.  It is probably safe to say that emotions are running high, as the market reacts wildly to short-term events.  As I said earlier, now is the time to do a “gut check” on your investment period, your willingness to look past short-term behavior, and to anchor your decisions into a concrete plan. 

If you are missing a plan that consists of target objectives and a proper time frame, you’re likely going to get thrown for a loop, especially when it comes to the behavior of investors and the market.  Behavior is going to matter.

If you have questions or comments, please let us know.  You can contact us via Twitter and Facebook, or you can e-mail Tim directly.  For additional information, please visit our website.

Tim Phillips, CEO, Phillips & Company 
Robert Dinelli, Investment Analyst, Phillips & Company 


i.              Bloomberg, L.P.