Tuesday, August 16, 2011

A Holistic View on Stock Market Volatility

The last few weeks have certainly been an interesting time in the markets.  But despite what the general media would have you believe, investors who didn't panic and bail out on their investment plan are doing ok. For evidence of that, consider in generic terms a hypothetical $500,000 portfolio invested half in Vanguard 500 Index Fund (VFINX) and half in Vanguard Total Bond Market Index Fund (VBMFX) as of the recent stock market peak of of July 22.  VFINX was at 124.01 on 7/22 and closed at 108.72 last Friday - a drop of about 12%. (ugh!)

Seeing $250k drop almost $31,000 down to $219,175 is gut-wrenching for sure.

But remember that is only part of the overall holdings.  The other half of the money was in the Total Bond Market Index Fund, which moved from 10.77 and to 10.99 over that same period - an increase of about 2%.  Which left the entire portfolio sitting at just over $474,000 on a combined basis - down about 5%.

Not great, but hardly tragic.

Obviously this is not a statistically accurate analysis of any specific portfolio and is certainly no prediction of any future performance.  And a properly diversified portfolio doesn't just hold U.S. large cap and U.S. bonds; real diversification means owning both large and small companies, domestic and international stocks, U.S. and foreign bonds.  But the concept is spot-on and critical:  the only sane way to look at your investments is to look at your investments as a whole.

And that reality is rarely as bad as we feel after watching the news.

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