Financial Planning Fridays #29: Emergency Drill

This is an emergency drill and it may be one of the most important things you ever do as a long-term investor.

Your investment accounts are down 40%, the market seems to be in a free fall, the economy and world are full of uncertainty, and there is no clear end in sight.

Now pause.

Take a moment to close your eyes and think about how you feel at this moment. Take some time to consider if you understand and feel comfortable with your investment strategy during an extremely difficult market environment like this. If you feel like you would sell your investments and abandon your long-term strategy, to avoid further loss, then you should not hold this type of

At Presilium, one of the ways we have found to get our clients ready for severe market declines is to prepare ahead of time and have a solid plan in place to both stay invested and continue buying during the inevitable downturns.

Let’s take a look at a $1 Million investment made in a 70% stock and 30% bond portfolio compared to 100% bonds.

We assumed that the stock portion is invested in the Vanguard S&P 500 Index Fund and the bond portion is invested in the Vanguard Total Bond Index Fund. The portfolios we design at Presilium are much more diversified than this, but this will certainly serve as the data we need for our emergency drill.
Over the past 30 years the 70% stock portfolio grew at 8.34% per year and would have been worth about $11.1 Million today. It is worth about $7.5 Million more than the all-bond portfolio. However, this portfolio was down almost 41% between October 2007 and March 2009.

The portfolio fell from a value of around $3.9 Million to a low of $2.6 Million, a temporary loss of $1.3 Million! The 100% bond portfolio was up about 7% during this same time.

Similar declines happened in the early 2000s and more recently during the global pandemic. Though it was uncomfortable, and definitely not fun, we at Presilium continued to rebalance accounts and added to stock during those challenging times. We did not advise anyone to go to cash during those severe market declines nor will we advise anyone to go to cash during the next crisis.

We out together a full range of potential investment models with their average annual rate of return, the current value of $1 Million after 30 years, and most importantly the maximum temporary decline that you would have had to endure in order to earn that return. As you can see, over the past 30 years, the larger the gain over time, the larger the decline that you had to endure to earn that gain.

So the question we each have to ask ourselves is, what return do we need to achieve our goals and what level of volatility can we bear to get there?

Warren Buffet once said, “If you don’t feel comfortable owning something for ten years, then don’t even think about owning it for ten minutes” and he was right. If you are not willing to stick with your long-term investment strategy during a severe decline, then you should very likely not be using that investment strategy.

For our clients, we believe that your current investment portfolio is the right one for you and your personal financial plan. Thank you and this concludes our Presilium Emergency Investment Drill.

Be on the lookout for our next Financial Planning Fridays episode. Subscribe to our Youtube Channel so you never miss an episode. Or contact us directly; schedule your 15-minute call with us today.