Every 8-12 Years or so, Seeking Safer Harbors

Many investors are wary of the stock market because downward corrections. Nevertheless, over the long term, most experts consider stocks a necessary part of a good portfolio.

The best money managers know how to diversify a portfolio so that it will perform over the long haul, without excessive risk. One such individual is Jon Castle, managing partner and chief investment officer at Paragon Wealth Strategies.

Castle told The Suit, “One of our firm investment policies is to help clients understand that there are two very distinct and separate markets. The first type is the normal, generally bullish market in which “stuff happens.”  The “stuff” are those unpredictable events you are seeing now: interest rate changes, China ‘s currency devaluation, Russia’s military actions, terrorist attacks, and so on.  All of these are examples of unpredictable events that cause temporary drops within a generally bullish market. But if you look longer term, 100 years of data says the markets generally do not drop more than 20 percent without a recession.”

“Over the last 100 years, there have only been three times when the market dropped more than 20 percent without a recession – 1966, 1998, and 1987.  Both 98 and 87 ended up being positive years in the market.  They were all relatively brief drops,” Castle emphasized.

“We build portfolios to handle those 20 percent dips,” he explained. “If you can handle a 10 percent drop and you’re 60 percent in the market, and the market drops 20 percent, then you’ll have about a 10, 11, 12 percent drop in your account, with proper asset allocation. It’s behaving exactly the way it’s supposed to. Markets recover from those types of drops in an average of 107 days, so investors should just ride out these types of drops.”

“However – every 8-12 years, a recession occurs.  Drops are more like 30-50%.  Economic data changes significantly - beforehand. When that data changes, we immediately seek safe harbors. We will have government bonds, long-term bonds, and treasuries dominating the portfolios during a recession,” said Castle.

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