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Portfolio Basics: Investing for the Long Term Thumbnail

Portfolio Basics: Investing for the Long Term


At Ebersole Financial, we firmly believe in the power of markets to compound the returns on your investments over time. Research has shown time and again that trying to time the markets is a losing strategy as we humans have a poor track record of predicting the future. The graphic below from Clearnomics highlights the importance of setting an investment strategy and sticking to it. As we can see, over the past 25 years, missing the one best day would have reduced your overall returns by more than 10% as compared to staying invested. And, it gets worse from there.  Missing the ten best days during the period would have cut your returns almost in half. That is a steep price to pay for trying, and failing, to time the market. 

The flip side of this phenomenon is that most investors, while staying invested and taking advantage of the power of the markets to compound returns, fail to rebalance their portfolios. This can lead to significant unintended consequences. The chart below from Clearnomics shows that inertia can have a significant impact on moving your original asset allocation way out of balance. Over a ten year period, your 60% stock / 40% bond portfolio will move to 82% stocks and 18% bonds with no rebalancing. This tends to create over concentrations in the higher performing assets classes, usually stocks, and increases your overall risk of loss and volatility as stocks tend to be riskier, on average, than bonds. Research has shown that portfolio performance can be enhanced through a periodic rebalancing program which has the added benefit of reducing your portfolio drift and thus lowering overall volatility and unwanted concentration risk in riskier assets. 

Long term investing is a great way to compound the growth of your investment assets. There are several relatively simple steps you can take to ensure that your are giving yourself the best chance to benefit from the return potential in the markets. First, make sure you are diversified and that you stay in the markets. Times of turbulence will test your wherewithal and those who can look past the short term pain will benefit from the long term gain. Second, review your portfolio on a periodic basis and rebalance as necessary. Given current technology and the low costs associated with portfolio trading, there is no excuse for unexpected or unwanted asset creep in your portfolio. Rebalancing will ensure that your portfolio never strays too far from your desired level of risk and will help smooth your ride. Third, if you don't have the time, mindset or the inclination to properly deal with the management of your portfolio, seek out some help. There are independent advisors, such as Ebersole Financial, who can help you as well as robo-advisor options from major players like Vanguard, Schwab and Betterment who might be a good fit.