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Having a Sound Investing Strategy in Place is a Financial Prescription to Avoid Wealth Shock By Joseph C. Williams, III, CFA®
May 23, 2018

A recent health study says “wealth shock” is a real phenomenon that could be hazardous to your health. A sudden and significant drop in an investment portfolio value can have the equivalent impact of a diagnosis for cardiac health disease.

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It may not take a health study to tell you that a significant plunge in your investment portfolio is psychologically painful, but the findings of a recently published article in Journal of the American Medical Association1 clearly linked one’s financial health with one’s physical health.

With increased stock market volatility now seemingly a weekly occurrence in 2018, investors may be feeling more of the symptoms of negative wealth shock.

With shifting government policies on international trade tariffs, stretched stock valuations and a nine-year bull run that may be starting to peak, the level of volatility in the stock market may be moving back to more historical norms versus the relative period of stability over the last two years.

Indeed, financial health may have more influence on physical health than first realized, according to the recent Health and Retirement study conducted by researchers at Northwestern University’s Feinberg School of Medicine in Chicago. American adults who experienced a sudden and substantial loss of wealth were 50% more likely to die in a 20-year period than were others in their age group whose financial situation remained relatively stable, or improved.

Researchers came to this conclusion after carefully tracking a group of nearly 9,000 Americans who participated in the study. Participants were born between 1931 and 1941 and were tracked from 1994 until death or 2014, whichever came first.

The study computed the net worth of each participant in 1994 and updated that figure every other year. Researchers used these figures to measure any substantially negative wealth reversal, defined by the study as a loss of 75% or more of one’s portfolio value over a two-year period.

This abrupt loss could cause stress, inflammation and/or high blood pressure, any of which could make serious cardiovascular problems more likely, the study said. In addition, a financial setback of this scale may well have prompted people to skip important medical appointments or to stop filling necessary prescriptions.

So one may not think this is news, but a dramatic decline in one’s investment portfolio is apparently a genuine health issue that could potentially impact many investors.

During periods of increased market volatility, many investors become nervous and begin to question their investment strategies. Remember that it is the nature of the markets to move up and down over the short term, so attempting to time the market is nearly impossible. In these normal cycles, it is important to stay focused on your long-term asset allocation goals.

“This is why we urge investors to seek the advice of a professional wealth manager when market conditions cause the kind of stress cited in a study like this,” said Commerce Trust Company Director of Investment Strategies, Joe Williams, CFA. “Having a well-thought-out allocation that can weather these changes helps investors sleep better at night.”

How to maintain your financial health during periods of increased stock market volatility:

CALL YOUR FINANCIAL ADVISOR IF YOU FEEL STRESS OVER YOUR PORTFOLIO

As mentioned in our message to clients during the market instability in February, investors should generally maintain their asset allocation goals in their portfolios and work with their advisors. We always encourage clients to contact their Commerce Trust Company advisors should they have any questions or concerns.

FOCUS ON WHAT YOU CAN CONTROL

World events, inflation and economic growth are just a few factors you cannot control, so worrying about them doesn’t help. You can, however, control how much you spend or save, as well as the diversification within your portfolio. Focus on factors within your control to help manage stress.

LIMIT THE NOISE

If you get unnerved by the market, tune out the media. Watching and listening to “chatter” can increase your discomfort.

SET A STRATEGY AND STICK TO IT

Investing to achieve your financial goals is a marathon, not a sprint. Don’t get off course to chase an investment fad or decide to sit on the sidelines because markets shift. Once you have a disciplined investment strategy that supports your long-term financial goals, stick to it. To ensure your strategy still supports your goals, review it annually or as life events, such as retirement, occur. After all, your goals are the reason you are investing.

EMPOWER YOURSELF THROUGH EDUCATION

While you should refrain from making any major investment decisions if you are confused or feeling overwhelmed, the more you understand how investments work, the better you will be able to manage investment risk. Education is a great antidote to fear.

INVESTMENT STRATEGY

Put these tips into practice when market fluctuations make you uncomfortable. Contact Commerce Trust for investor education or to find a trusted partner who can help you manage your investments through all market cycles.


Disclosures:

1 https://jamanetwork.com/journals/jama/fullarticle/2677445

This summary is intended to provide general information only and is reflective of the opinions of Commerce Trust Company regarding investing. This material is not a recommendation of any particular security, is not based on any particular financial situation or need, and is not intended to replace the advice of a qualified attorney, tax advisor, or investment professional. Diversification does not guarantee a profit or protect against all risk.

Commerce does not provide tax advice or legal advice to customers. Consult a tax specialist regarding tax implications related to any product and specific financial situation.

Data contained herein from third party providers is obtained from sources considered reliable, is referenced for informational purposes only, and may be of interest or value to the reader. However, the accuracy, completeness or reliability of third party information or data cannot be guaranteed. Commerce Trust Company is a division of Commerce Bank.

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ABOUT THE AUTHOR

Joe Williams
Joseph C. Williams, III, CFA® Senior Vice President, Director of Investment Strategies Commerce Trust Company
Joe is the director of investment strategies for Commerce Trust Company as well as a senior portfolio manager. Additionally, he serves on the Investment Policy Committee and the Equity Strategy Committee. Joe is the co-manager of the Commerce Growth and Mid-Cap Growth strategy. He has more than 37 years of experience in investment management with Commerce Trust. He received his bachelor of science degree from Drake University and is a member of both the Kansas City Society of Financial Analysts and the CFA Institute. He holds the Chartered Financial Analyst® designation.
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