Volatility has returned in full force to world stock markets and I am frequently asked for advice on “what to do” now. One of my ski patrol friends shared a great analogy with me on a chairlift at Winter Park a few weeks ago. He compared successful investing to a long whitewater expedition - long hours of calm punctuated by seconds of chaos. I led an 18-day private trip of 16 people on 7 boats through the Grand Canyon in June of 2014 and there were times during the trip, such as rowing the infamous Hance, Crystal and Lava Falls rapids, that were comparable to navigating the turbulent market conditions we are in now.
In order to prepare our group for the big rapids, I did not wait until we got to the scouting beach above the rapids to give rowing lessons. I also did not stand on the shore screaming instructions to passing boats. We started planning and preparing well over a year in advance when I picked the team and took the newer captains out on less demanding rapids where they could refine their skills and gain confidence. I spent a lot of time making sure everyone knew exactly how to plan for the trip and what to pack, and made sure that we were well prepared to handle almost any situation we could find ourselves in.
I am often asked for my professional opinion on “the market” which is tough, because I don’t actually believe it is possible to consistently predict short-term market fluctuations. With that said, I am skeptical of many of the currently popular narratives, such as an impending market crash, because we haven’t really had a boom to crash from. It is true that some market indexes have tripled in the past seven years, but only from a deep trough following the 2008/09 banking crisis. Another popular narrative is that bull markets never last much more than five years. But are we really in a bull market? Markets have been sliding for nine months. Some markets, and many stocks, are already down more than 20% which marks an official bear market.
Perhaps we are in a shorter-term cyclical bear market within the larger secular bull market? I don’t know, nor does anyone else. The financial networks and websites are tripping over themselves analyzing economic fundamentals and theories. In the short-term, markets are so unpredictable because they reflect the current collective emotional state of investors, not fundamentals.
So what constitutes actual useful and wise financial advice at a time like this?
Have A Financial Plan
I read this month in the Motley Fool that “Investing is an epic battle between your goals, your temperament, and the self-interests of middlemen.” Without goals you have no plan, and a written financial plan makes it possible to identify and have confidence in the proper financial strategies to implement your plan. Starting a financial plan begins with identifying and prioritizing your goals, and writing them down. (I will write about the self-interests of middlemen another time.)
Consider Your Financial Temperament
Investing would be so much easier if we all had the cool emotion state and logical mind of Mr. Spock, the half-Vulcan character from the original Star Trek. Looking at a long-term chart of stock market returns, it is not hard to convince ourselves that this is the most logical place to invest our retirement savings. But we will only enjoy those impressive compounded returns if we can stay invested in the market over long periods of time. For many of us, a realistic assessment of our temperament leads to a decision to de-risk our portfolio somewhat to limit the swings in our portfolios in times such as these. On the other hand, a written financial plan may make it obvious that we need to take more risk to be able to grow our portfolio enough to retire comfortably.
Review Your Portfolio Diversification
The S&P 500 Index of large US stocks has outperformed the MSCI World Index each of the past three years and six out of the last eight. Since 1970, the S&P 500 has outperformed 23 out of 46 years – exactly half. Proper diversification can increase returns and decrease volatility, and as Sir John Templeton said, “The only investors who shouldn’t diversify are those who are right 100% of the time.”
Liquidity is Critical
We have all heard the advice about having 3-6 months of expenses set aside in a highly-liquid and safe “emergency fund,” but in times of very low interest rates it is difficult to justify this. In addition to creating a resource other than credit to draw upon during an unexpected time of need, having liquidity provides additional peace of mind during times such as these and makes it possible to take advantage of great investment opportunities that may present themselves.
The Time to Make Changes is Now
I often hear that folks are waiting for the right time to make the changes they know they need to make. The truth is, they will only know in hindsight when the perfect time would have been to diversify their portfolio or de-risk. The chances in the short-term of the market rallying or sinking lower are usually about the same.
If this article has raised any questions or sparked any interest, we would love to invite you to call or pay us a visit where you can pick our financial brains for an hour over a complimentary cup of coffee. Please call Jenny at 303.900.4018 to schedule a conversation or visit us at stewardshipcolorado.com to learn more.