Don’t be alarmed by the title. We do not attempt to, nor could we, predict the short-term or even mid-term direction of the market. But History 101 would tell us that a downturn of some kind will eventually happen; and considering that the current bull market is the longest in history, now is as good a time as any to be sure we are prepared.
Preparation does not include keeping most or all of your money in cash. Again, we are not market timers, but keeping too much money in cash erodes its value over time due to inflation. Think about what your parents spent on a gallon of milk, a car, or even a house 25 years ago. That will give you a good idea of what happens to your purchasing power if you try to buy the same amount of goods and services today compared to what it would have purchased then. Therefore, parking all of your money in a savings account earning little to no interest or hiding it under the mattress are not good options. For money you might need in the short-term, maybe. Otherwise, there must be a better avenue to prepare for an eventual downturn.
Preparation also does not include panicking. Panicking causes investors to make costly investment decisions at the worst possible times. If investors pull out of the market altogether, not only do those decisions cause losses when the market is near a bottom, but then they lose out on the recovery and rally that has historically followed every bear market. The S&P 500 Index dropped roughly 50% during 2007-2009; however, afterwards from its low, the index has gained over 400% and counting. Selling off without a strategy can also cause tax consequences if the transaction incurs short-term gains to be taxed at higher rates than if left to be categorized as long-term capital gains. There are times and situations where it is warranted, but as always, we would recommend you consult your CPA for the best tax advice.
Complacency is the opposite of preparation. It is an enemy of our success when we allow it to keep us paralyzed and non-proactive. Ron Chernow correlates complacency with our finances when he says “You don’t want too much fear in a market, because people will be blinded to some very good buying opportunities. You don’t want too much complacency because people will be blinded to some risk.” Not doing anything and hoping things will work out when it comes to our financial future is not preparation.
PLANNING is the best preparation! And that is exactly what we do as fee-only fiduciary financial planners. We learn about your values, life story and future goals to help you make wise financial life decisions that allow you to feel more confident in your financial future. Are you overexposed to overvalued areas of the market? Are you diversified among different sectors of the market? Do you have an appropriate blend of U.S. verses international equity and fixed investments? What about large growth stocks/funds vs small value stocks/funds? Do you have too high a percentage of your portfolio concentrated in the stock of your employer? Are you managing the correlations between investments in your portfolio? At Bridge Financial Planning, we help determine what asset classes, allocation ranges and risk profiles are acceptable for your specific needs, risk level and time horizon. We guide you in developing a strategy that you are comfortable with to weather the ups and downs of the market.
How long has it been since you stress-tested the entirety of your financial holdings? We use this tool to illustrate what a downturn in the market could do to your portfolio. This gives insight to tailoring a plan that brings peace of mind with the uncertainties of life. One needs to take reasonable steps to mitigate the effects of a downturn while maintaining enough of an equity mix to negate a loss of purchasing power in the long run and meet long term goals. And that looks different for each individual person and/or family as they plan for their future and strategize to meet their unique goals. But the key is planning and preparation.
So what is your plan and how will you navigate the volatility and unpredictability of the market? We can build a comprehensive plan and investment strategy that connect your goals for tomorrow with today. As fee-only financial planners, you can be confident that you will receive professional advice as well as planning and investment management services that are flexible to meet your needs. Then when the market downturn happens, and it will happen sometime in the future, you will be PREPARED.