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  • Writer's pictureOwen

The hardest part of financial planning? Sticking to the plan.

Market dips, like the recent one always test at least one client's commitment to their long term plans. The urge to cut and run and wait for clear skies is huge. It is almost always a terrifically costly decision.

There is a truism: the hardest part of a financial plan is sticking to it.

The urge to cut holdings and "protect myself from this market" is most often not only ineffective, but damaging.

The best days are critical to your returns.

The oddity of stock market investing, is often the best days are the ones after the fall.

Here is research that shows how much of the stock market gains are contained within those exceptional days.

You halve your returns by missing the best 10 days in 20 years!

The best days are at the worst times.

The chances of a 5% gain in a single day are usually zero.

Yet after the market falls heavily, the chances of such a 'big up' day jumps significantly.

It's hard to imagine a more counter-intuitive point for the average investor, so let's go to the data and an image to show the point. Big jumps happen during a crisis.

The blue little line graphs show the single day change. The biggest single day gains are clustered during the financial crisis and COVID crashes.

Years go by with no 4% up days. Then you get a big cluster together.

The key is to stay invested and stick to your plans. It is too much to expect to buy during a big down day near the bottom. Apart from Warren Buffett, very few have that stomach.

Plan rebalancing can make your actions productive.

Sticking to your plans doesn't mean that you do nothing.

Rebalancing your holdings on a regular basis IS useful, It helps to reduce an overweight position after a strong run and thus achieve a "sell high and buy low" kind of strategy.

For example, at the end of 2024, Q1 equities had done nicely in most markets, but bonds had lagged as rates edged up. Thus selling a small slice of equities and buying a small slice of bonds, just before the recent sell-off, is a classic example of a useful rebalance.

During the financial crisis, US treasuries had done exceptionally as rates crashed. Rebalancing progressively moved investments from bonds into the stock market. That turned out to be an exceptional time to invest, despite the headlines of the media.

But mostly, we like the rebalance strategy for clients because it helps give the impatient investor the illusion of action without altering the core of the strategy. It keeps you invested and ensuring you pick up the best days.

Caterer Goodman Partners

Caterer Goodman Partners (CGP) was established in 2011 to service expatriate families in Asia. The goal was to remove conflicts of interest from financial advisory. To produce solutions that are clean, simple and transparent in a way that we'd like our money managed. CGP is a US registered investment advisor.

This information is purely general and does not constitute professional advice. This article should not be seen as an endorsement of a particular advisor or guarantee of any company or companies. Investors, both private and corporate, should consider all advice and disclosure documents before making any business or investment decisions.

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