The Importance of Staying Disciplined

An important aspect for your financial success, widely overlooked by investors, is a written investment policy statement. The investment policy statement or IPS for short, is a long-term plan designed individually for each client's unique situation. Further, the IPS lays out each investors return objective, risk tolerance, liquidity needs, and any restrictions one might have (for example, requiring one to invest in socially responsible manner). As with any plan, it only works if you stick to it. Investing in the market involves risk that your investments will decline during certain periods of time. This short-term volatility can be a distraction from the long-term up-trend of the markets. Many long-term investors fled the equity markets during the financial crisis of 2007-2009 and have not returned. These investors on the side line have now missed out on one of the longest bull market runs in history. If they had stayed disciplined during this tough market they would have recovered all of their losses plus more.

As the graph below will show the 500 largest stocks in the United Stated decline approximately one out of every four calendar quarters. It also shows that from 1984 to 2013, 25 out of the 30 years with a large negative quarterly return ended the year with a positive return -- further showing the importance of staying discipline to your long-term financial plan.

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Having an investment policy statement is crucial for your long-term financial success. It should be regularly updated as your unique family situation changes. Having a fee-only, fiduciary, evidence-based investment advisor by your side during short-term market volatility will also help you stick to the long-term plan set out in your IPS. Do you have an investment policy statement?