By Dave Coen
Let’s look at the facts.
- This year the markets had the best first half of a year since 1997. (1)
- The Dow had the best June since 1938. (2)
- Unemployment rates continue to hover near 50-year lows.
- First-quarter GDP grew at an annualized rate of 3.2%. (3)
- U.S. stocks posted their largest one-day losses of 2019 on Monday. (4)
The day-to-day news can be like watching heads turn at a tennis match. One day everything is fine and the next day could be a day of what the media calls “huge” losses. Last week it sure didn’t seem like we were on the verge of a market downturn, did it? Although the headlines tell us that Monday, August 5th, was another story, we are still in a record-breaking bull market. There might be a downturn sometime soon, or there might not be. The reality is that despite some headlines predicting the future in both directions, nobody knows.
The question you should be asking is not “When will the next downturn happen?” but “Will I be ready?” Here are a few things to keep in mind that will help you prepare for the next market downturn, whenever it comes.
Use Your Head, Not Your Heart
Why are the wedding and baby industries so profitable? Because emotional people don’t make rational decisions with their money. So that means many people lose big during downturns because they let their emotions take over. Simply put, emotions affect our investing results, especially when we chase above-average returns. (5)
Stay away from timing the market, but also try to avoid making major changes to your account in anticipation of a downturn. Erring too much on the side of caution too many years ahead of retirement may prevent you from gaining the potential returns you need to retire on your terms.
Just because you are a few years from retirement at, say, 65 or 67, that does not mean that all of a sudden you should change everything in your portfolio to be conservative. Consider when you will want the money. Do you want some for the next 5 years? Will you want some in 6-10 years from now? Will you want some in 11-15 years from now, at the age of 80? How about at the age of 90 in 25 years?
This all takes careful planning, so come up with a plan right now while you’re thinking rationally, and stick to it despite your emotions. You’ll be glad you did.
Mix It Up
Remember the infamous “Dotcom Crash”? (6) If not, here’s a recap. In the 1990s, investors placed their money heavily into the early e-commerce sites, and when it burst, it was a hard day for many.
Then, when people were losing faith in the stock market, they looked at real estate as well as their own homes as the place on which to focus their sights (and money). This eventually led to the Housing Market Crash of 2008, (7) and eventually bled into the Great Recession.
If history teaches us anything, you never want to put all of your eggs in one basket. There’s no guarantee that the bottom of the basket won’t fall out.
Instead, have a properly diversified portfolio with a combination of different investment sources. Modify your portfolio to include stocks of varying risk levels (safe, moderate, and high risk), and spread your money out between stocks, bonds, funds, and investments in different sectors. Look at regions around the world, not just the U.S., and diversify internationally. Consider the fund managers and the future prospects in various markets and sectors. This way, if one investment fails, it won’t devastate your whole portfolio.
Plan For Diversified Income
Economic downturns often go hand in hand with job instability. So, in addition to diversifying your investments, consider diversifying your income sources as well. Besides your salary, consider where other sources of income can and will be coming from. This might mean investing in rental real estate or other income-producing investments, picking up a side job, starting your own small business, or making money online. The more diversified your income, the safer you’ll be.
Create A Safety Net
The LUC Factor (Liquidity, Use, Control) is extremely valuable, so build up your safe bucket. You will never find peace of mind in the markets alone. A vital part of proper planning is to give yourself the LUC so the money is there if you need it, and it’s one less thing to worry about in a tough situation. Remember, too, that in a down market, those with liquidity and control of their money will often have amazing investment opportunities that could only come around once or twice in a lifetime if you are ready. That “safe” money can set you up for some extremely valuable future assets.
While safe investments may not provide a lot of growth in ordinary times, having a safe contingency fund with at least six months of living expenses will protect you against having to sell investments at low values to free up cash. Examine spending patterns and find ways to tuck away even more into your safe bucket with various financial tools, such as short-term bonds, high cash-value insurance, certificates of deposit, or Treasury bills.
Stop Trying To Predict When The Next One Is Coming
The only long-term guarantee in investing is that there will be short-term fluctuations and nobody can predict when they will come. Just last week, the market was at a record high, and this week Monday the market had its largest loss of the year—and then bounced back the next day. We’ll experience bear and bull markets in the decades ahead just as we have in the past decades. Rather than fear change, focus on preparing for it.
Are you ready to see all your options for protecting your money? Get started by emailing me at dcoen@sageviewadvisory.com or calling 800-814-8742.
About Dave
Dave Coen is a Financial Advisor with SageView Advisory and the CEO of College Planning America. Along with his retirement financial industry experience, he is a College Planning Specialist. He works closely with individuals and families to provide comprehensive financial planning that addresses all elements of their financial picture. Learn more by connecting with Dave on LinkedIn.
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This material is designed to provide accurate and authoritative information on the subjects covered. It is not however intended to provide specific legal, tax, or other professional advice. For specific personal assistance, the services of an appropriate professional should be sought.
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(1) https://www.cbsnews.com/news/best-first-half-for-u-s-stocks-since-dotcom-era-20-plus-years-ago/
(3) https://www.carsonwealth.com/insights/market-commentary/weekly-market-commentary-april-29-2019/
(4) https://finance.yahoo.com/news/stock-market-news-august-5-2019-114434812.html
(6) https://www.investopedia.com/features/crashes/crashes8.asp
(7) https://www.investopedia.com/features/crashes/crashes9.asp
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