Financial Planner 43551

The Market Was Up; Why Wasn’t My Account?

In Investment Management, Steward Articles, The Insider by Adam Cufr

Last week’s election results came as a surprise to many, namely the media, who were quite confident in predicting a different outcome. The markets had their own ideas about who would prevail and what that would mean for the future of a number of industries. In the midst of all of this, the question has been asked, “The market was up, why did my accounts appear to lose value?” Very good question.

Simply put, ‘the market’ is a really vast, complex animal. While the Dow Jones Industrial Average (“The Dow”) saw modest gains after the election was decided, not all industries benefitted equally. One example is healthcare. With Trump’s campaign built upon a repeal of ObamaCare (The Affordable Care Act), his election as president signaled a new day for the healthcare industry. As a result, it saw significant gains immediately following the election.

Healthcare gains, added to the gains seen by the financial industry, made the market look quite strong. However, your old friend, diversification, had one foot firmly planted on the brake pedal. You see, The Fed had been waiting for an opportunity to increase interest rates.  As you may recall from past articles, a rise in interest rates results in sinking bond fund values; they have an inverse relationship. So while, some stocks were up, the entire market was not, and bonds were down. That’s how diversification often works.

So why do we diversify our portfolio? I suspect you know the answer, but I’ll elaborate anyway. Had the stock market’s investors viewed the election results differently, those bonds in your portfolio would have provided a much-appreciated buffer against a falling stock market. Add to that the fact that bonds generally pay a steady interest income stream, and you can see how diversification tends to smooth out the ride, allowing you to focus on your long-term goals rather than the daily roller coaster ride in the market.

One note worth pointing out: the night of the election saw the futures markets crashing around the world, down 900 points. This signaled a very poor start to the day after the election for the stock market. As you now know, that didn’t happen. If it had lead to a huge drop in stocks, diversification would have paid-off substantially.

So while the markets appear to be doing just fine, post-election, there’s a lot more to the story than often meets the eye. The ‘market’ may be up while your account is down, and vice versa.  The key is to apply sound principles and set long-term goals while the market does its thing from day-to-day. When we see reasons to shift strategy, we’ll let you know that. Until then, enjoy the fall…the SEASON, not the market!

All the best,

Adam Cufr Signature

Adam Cufr, RICP®