When markets fall, they fall fast

January 2016 will go down in history as a dyed in red beginning of the year. Although it isn’t obviously a situation to be happy about, we can think of it as a great lesson. It is useful to show the dark side of the market, which easily remains forgotten when everything goes up. Depending on the way you look at it, markets haven’t stopped climbing almost without interruption and with very few corrections since 2009. Markets have given us a lesson starting last August 2015 up to and through December 2015 and finally in January 2016. The fact is that markets do make corrections and when they go down, they often do it quickly.

There’s a high chance to experience losses in the short-term

 

The first lesson we must write down in our investor’s instruction book is that markets go down faster than they rise. This could occur when we invest for the first time. By the time any of our potential customers go through the process of knowing their profile, there’s a probabilistic graph that shows in the bottom part the (real) possibility of being in the red. Although our dynamic investment strategy for diversified portfolios is designed to amortize these falls (especially when they are extreme) it is imperative that the investor keeps in mind that the chance of having falls is higher at the beginning of any investment activity. These likely falls will be higher the greater the variable income ratio. Based on a more traditional point of view, it is common to link volatility with risk; however this isn’t the only possible association. If there’s a dark side of markets there’s a bright side as well. In the chart shown above, taken from the book “A Random Walk Down Wall Street” by Burton G. Malkiel,” you can see for yourself what happens after the fifth year.

How to invest, Inbestme’s Scope:

 

What occurred after the fifth year teaches us how we should invest. As time goes by the probability starts plummeting until it becomes zero. In this way, anyone who invests in the long run minimizes the risk of losses.

It seems like investors had to pay an entry ticket to start investing. This ticket would mean the risk of losing money in the short-term. Once the bill is paid, the prize will be to receive long-term returns as long as the investor doesn’t give up too early.

Consequently, it is possible to learn a double lesson for our book of instructions:

  • Markets go down quickly and rise slowly. This fact requires patience.
  • Markets always go up more than they go down

Therefore, don’t let that the dark side of markets prevent you from seeing that the patient investor has luck on their side.

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