September 14, 2018
Can we have another Lehman Brothers style stock market crash again?
You wouldn't be blamed for deleting this post right now. That is, if you think that is all the information you need to make investment decisions for the rest of your life.
The more relevant question is "Am I prepared for it?"
You see, I could give you tons of reasons why stocks could keep going up. I could also give you tons of reasons why stocks could go down. This is precisely why I don't believe in "all or nothing" strategies. Balancing out all kinds of qualitative and quantitative factors is the way to go.
That timeframe kept me crazy busy. What got me through it was that I had my clients invested appropriately based on factors like their age and risk tolerance. Sure, we had drawdowns, but they were within expected bounds and they recovered soon after - the essence of what proper and personal investment portfolio management is all about. It also got me started on my writing kick. I've always written about financial/market/economic topics, but the Great Recession is what really vaulted my content creation into high gear. I wrote extensively about those days; the cause, the players, the economy, the funky derivatives, the Federal Reserve, etc.
Your investment decisions starts with your time horizon - the amount of time to your retirement, college for your child, and your life expectancy. I know that last one is tough to think about, but ultimately, isn't it every investors' goal to not run out of money before they die?
This past week marked the 10 year anniversary of the bankruptcy filing of Lehman, which again, is why you're hearing so much about it now. It's the singular event that's given credit as the spark that ushered in the worst recession in the U.S. since the Great Depression. No doubt, you've been reading and watching past video clips that are taking you down memory lane - more like down nightmare lane. But I digress. I'll skip the trip down memory lane stuff and get into lessons/thoughts that could help you get prepared for the next big stock market disaster no matter when it happens and no matter what causes it.
- Valuation means nothing as far as market timing goes. No matter how high commonly used market metrics are, they won't tell you when stocks will reverse. But valuation could tell you a lot about how much a stock market reversal could go up or down.
- Letting your winners ride is the best way to make money in stocks. But trimming them back along the way higher is a must-do because sometimes you wind up in the next GE, Lucent, or WorldCom.
- Understand that if your portfolio has gone up a lot in the last 10 years, you may not need to take as much risk going forward. Take no more risk than you need to take. Invest for the return that's appropriate for you and not anyone else. That's what I help my clients figure out - with data, not opinions.
- Rebalancing is important and the fact that the stock market went higher without you rebalancing doesn't make you right or smart. It makes you lucky. Rebalancing is like a personal compromise; you give up some upside for a little less downside.
- Past performance is not a promise of future performance. But if you do not understand how much your portfolio could go down based on how much it went down or would've gone down in the last severe bear market, then you're walking toward a cliff while wearing a blindfold.
- Everyone has an appropriate risk profile. It needs to be measured and re-measured throughout one's investing life. You need to be able to quantify yours. And then you need to quantify the risk profile of your portfolio and make sure that metric matches your personal risk profile. Sounds easy to do, except that it's not. If you want to quantify your individual risk number right now, click HERE.
- Don't get caught up in what the big (really big) investors are doing. It's why I'm not phased when Mark Cuban or David Tepper get negative on stocks or when Warren Buffet is positive on stocks. Icahn, Dalio, Griffin, Singer, Novogratz, Ackman, Einhorn, Loeb; they're not retirement plan wealth accumulators or preservation-of-assets savers. They simply use different strategies that may or may not be the right ones for you. Some use leverage, some buy entire companies, and some have the resources to mount proxy fights. You need your own strategy or you need help discovering, implementing, and monitoring one.
- The bear market in 2008 made bulls look stupid. The bull market over the last 10 years is making bears look stupid. Old phrase says pigs get slaughtered. Well, I say that sheep get slaughtered too. Balance, people, balance!
- The best thing I heard this week was Jeff Bezos say that he doesn't feel 30% smarter if AMZN goes up 30% and he doesn't feel 30% dumber if AMZN goes down 30%. You deserve to take that statement and apply it to your own investment portfolio. That's why you are playing the long game. The game really never ends, so pace yourself.
- There's nothing wrong with selling a stock and hiding in cash until you find something that is both appropriate and compelling to you. You're not a mutual fund manager who has to be fully invested at all times. You are not going to be audited by Morningstar or Lipper. But you are going to have to answer to yourself in 10 or 20 or more years. So, make sure you're getting ready for it.
Good luck out there,
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All the views expressed in this report/commentary accurately reflect our personal views about any and all of the subject securities or issuers and no part of our compensation was, is, or will be, directly or indirectly related to the specific recommendations or views we have expressed in this report. This material is not intended as an offer or solicitation for the purchase of sale of any security or other financial instrument. Securities, financial instruments, or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values, or income from securities or investments mentioned in this report may fall against your interests, and you may get back less than the amount you invested. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. You should consult with your tax adviser regarding your specific situation. Diversification is a method of managing risk and doesn't protect against loss in a down market.
Mitchell O. Goldberg, AAMS, President | Investment Professional
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