3 Lessons From the Sell-Off

Look abroad, diversify and know your goals.

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Kelly Campbell

Like the previous two weeks, last week was a roller coaster ride. If you had the typical portfolio like most Americans, you lost around 15 percent in less than a month. But let's not dwell on the negative. Let's talk about what we can learn from this difficult time. 

First, because companies have become so reliant on global markets for revenue, they respond quickly to an international economic downturn. As a matter of fact, some statistics show that many U.S. companies receive as much as 50 percent of their revenue internationally. This is not something temporary. Therefore, international events can impact your investments. 

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Second, you can't invest like you used to. I meet with many investors, and consistently see the same portfolio over and over again. The average portfolio seems to be allocated 80 percent to domestic stocks and bonds, and the other 20 percent is allocated to large-cap international stocks with an occasional small stake in global bonds. 

And that's it. Unfortunately, that is not very diversified.

 Remember, diversification comes from having investments in your portfolio that do not react the same way to various market conditions. But with the globalization of companies, many international stocks respond similarly to markets as do domestic stocks. The proper term for this is correlation, which refers to the way two investments react to one another.

If two stocks have a correlation of -1, it means they move in the opposite direction. Two stocks that have a correlation of 1 move in the same direction. Two stocks with a correlation of zero do not impact one another. The best scenario is having a portfolio containing investments with no, or very little, correlation.

 [See In Pictures: 5 Ways to Measure Investment Risk.]

Think of it like this: If your entire portfolio has a correlation of 1, when the market goes up you are happy, but when the market goes down, your whole portfolio follows it down. So work on getting that correlation closer to zero.

Finally, comparing your success only to the return of the markets is a recipe for disaster. People live and die by the Dow Jones Industrial Average or the S&P 500 Index. When your portfolio beats the market and sees a 12 percent rate of return, it may make you happy. But how do you feel when you make 12 percent the following year, but the market returns 25 percent. Do you get upset? If you do, that is a problem.

[See What the Latest Fed Policy Means for Your Money.]

Your portfolio should be assembled to achieve your personal rate of return. In other words, try to get the return you need. Attempting to beat the market each year is fruitless and too aggressive. If the market is down 38 percent (like it was in 2008) would you be happy if were only down 30 percent? You beat the market, didn't you?

Remember, things have changed. The market is different and you need to invest differently to achieve a competitive return with less risk.

If you want to get the same thing you always have, keep doing the same thing that you have always done.

Good luck and happy investing.

Kelly CampbellCFP® and Accredited Investment Fiduciary, is founder of Campbell Wealth Management, a Registered Investment Advisor in Alexandria, Va. Campbell is also the author of Fire Your Broker, a controversial look at the broker industry written as an empathetic response to the trials and tribulations many investors have faced as the stock market cratered and their advisers abandoned their responsibilities to help them weather the storm.