A bear market is not your biggest risk. It's your lack of engagement with your financials.
Is this a "Goldilocks" environment for investors? I mean; low inflation, rising labor productivity, the lowest unemployment in 50 years, the widely anticipated Q1 earnings day of reckoning never materialized, and the Federal Reserve is on hold. What more can an investor ask for?
Not to say that everything is hunky dory in investor world. A lot of this year's gains in the broad averages were driven just as much by low expectations as they were by decent fundamentals. It's only been about a week since the major large stock averages all finally recovered from their Holiday slam late last year. Technically speaking, breaking to new highs is usually a bullish signal that more gains are ahead. But declining home values in NYC and San Francisco, slowing automobile sales, global ISM numbers looking sluggish, and other stats that are showing signs of softening, one has to wonder - no, consider - when low expectations aren't low enough, setting stocks up for disappointment later this year. That last point is, in a nutshell, the case for a bear market. On the converse, the bull market case is that more people than ever are employed and their incomes are keeping up with, if not exceeding, inflation. That last point means strong consumer spending.
But investors are still scarred by events 12 years ago, when the housing market started to slide, consumer access to credit started to become restricted, and overcapacity in the global economy caused massive layoffs around the world. What turned a bad recession at the time into a Great Recession was that asset values that were used as collateral by banks; real estate, derivatives, bonds, and consumer debt; all took a hit simultaneously. Our biggest financial institutions suddenly saw their capital erode when they had to mark-to-market their assets. They were using their money for their own survival because they had to. That left nothing over to extend credit, which is why you used to hear that access to credit became too restricted.
Why did I just take you on this little walk down memory lane? Because I want to give you the proper context so that when I say that every negative stat, in the minds of many investors, is linked directly to that nightmarish time when the U.S. Government let Lehman Brothers go bust and nearly set our economy back a hundred years. Fringe economists were actually screaming for the return of the gold standard!
Anyway, this is how I explain the V chart above - the air pocket that sent stocks down followed by the swoosh that pushed them right back up again. Investors skip over feeling concerned about stocks and the economy and go right to the scared sh#%less stage. Enough of them, anyway, to cause massive volatility out of nowhere.
Now, let's inject politics into the equation; talk of a possible impeachment, Medicare for all, social media regulation, a growing budget deficit, a mendacious President, financially illiterate Congress members - The. List. Goes. On. And on.
We have never had more possible scenarios to factor into our investment decisions like we have today. No one could be blamed for feeling like a stock market doomsday could hit at any time. I want to stress that I don't mean to paint all investors with the same brush.
Regardless of which brush I need to paint you with, to take this metaphor a little further, what would you do if you somehow knew that a bear market lasting several years was ahead? As a financial advisor, I make no guarantees. But a bear market is ahead. I just can't and shouldn't predict the timing of one, especially in a broadcast email. I do have my thoughts about the probabilities of one and you are welcome to call me directly to discuss them.
Regardless, here's the key to surviving bear markets:
- If you're 5 to 10 years ahead of retirement, you need to assess your stock exposure and make sure that's in alignment with your risk tolerance - NOW.
- If your 10 to 20 years ahead of retirement, you need to rebalance your portfolio between stocks, bonds, and cash holdings according to your risk tolerance - NOW.
- If you're more than 20 years ahead of retirement, you need to invest for growth - NOW.
It's all about being prepared for possibilities, knowable and unknowable, which is why investing and insuring according to your current life's stage and your future life's stage are so important. Getting broadsided by calamitous events, gut wrenching bear markets, and even the possibility of a bear market taking more than 10 years to get out of, all need to be taken into consideration.
Note how this email is not a cheap grab for clicks by naming "5 stocks for future powerhouse gains" or "This one stock could make you a Billionaire"? It just reminds me of two things I have said in the past and want to tell you again. Now.
When someone asked me recently what I do for a living, I replied "to help you watch paint dry for the next 30 years while stopping you from acting on your worst emotions, fear and greed"
Investment, financial, and retirement planning is difficult because my industry loves "one size fits all" stuff. Once anyone in my industry gives up that kind of thinking, creating the aforementioned plans becomes much easier, much quicker. There is no magic template, one and done software program, and an algorithm on a cloud that could change this.
The biggest danger I've seen to investors' and savers' long term success is not a bear market or recession. It's their lack of engagement. Regardless of how fickle investors could be today, selling a whole bunch of mutual fund or ETF shares every time you get scared is not a path to long term success. Your best bet is to get ahead of the next major downtrend by properly allocating your accounts today. For some of you, that may mean lowering your stock exposure and to others, it may actually mean increasing it. But while the gettin' is good in investor world, why would you wait?
Here are a few videos to help you out. If you're thinking about switching to a new financial advisor, please click the "LET'S TALK" picture below.