Volatility and Long-Term Gains

2020 – A Year of Volatility

Along with the COVID-19 pandemic that became the new normal, 2020 was a very ‘interesting’ year in the equity (stock) markets.  The markets, as represented by the S&P 500, started off with optimism only to see a 30%-plus drop due to the COVID-19 pandemic in February.  Stocks bottomed out in late-March and then recovered very quickly through the remainder of the year with a few small corrections along the way. Amazingly, the S&P 500 finished 2020 16% higher than at the start. These extreme highs and lows were a great demonstration of the volatility, or potential variability, of the equity markets.

Many people like roller coasters at theme parks but not with the money they are trying to save, grow & protect for their future retirement and/or financial independence. Unfortunately, many stock-market investors panicked during the February-March down-turn and sold near the bottom in March.  Had they weathered the storm, they could have had a positive year instead of a losing year.  Panics of this nature are typical human behavior and have been seen in every significant market downturn in history. 

Investing solely in the stock market and panicking during downturns is how 401Ks became 201Ks.

How does the average investor shield their financial assets from high volatility – through diversification and ‘staying the course’.

Diversification

Diversification means distributing your investments across more than one asset class.  Typically, this is done through an allocation across stocks and other products. These other products will not have as much risk/return and typically not as much volatility. 

A great example of a diversifying product is Indexed Universal Life (IUL) which provides a death benefit to protect your family and also cash value accumulation that can be used for future income (like retirement). The cash value grows based on an interest crediting strategy that is tied to changes in a market index such as the S&P 500.  Downside protection is provided through minimum guarantees to ensure that your cash value will not decline due to decreases in the index. If the index has a losing year, the return does not go below the floor which is often set at 0%.  If the market has a winning year, the return is similar up to a certain maximum or ‘ceiling’.  IUL protects against volatility by never losing in a down market year while also providing gains, up to a limit, during positive market years.

‘Staying the Course’

‘Staying the course’ simply means staying committed to your diversified plan and not panicking when short-term changes occur.  In other words, not trying to time the market.  This approach requires commitment and confidence and can be challenging when others are fleeing the market.  Saavy investors stay calm knowing that historically, the markets have always recovered within a few years of a signifcant down-turn.

Options & Education – A Path to Success

As financial planners and tax consultants, Monument Financial Group can present several options (alternatives) that align to your financial goals.  We take the time time to educate you on the level of diversification, the projected risk/reward and the tax implications of each option. 

The options and knowledge sharing we provide will help you understand the various pros & cons of a particular plan and you will make a more informed decision. If we said “just do this” – then you would be less likely to delve deeper into the ‘why.’  This ‘options and education’ approach is what sets Monument Financial Group apart in the financial services industry.

Please call 719-453-1853 to begin working with Monument Financial Group on your plan to save, grow and protect your money for your future and your family.

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