Preparing for a Potential Downturn
With the stock market experiencing a sharp sell-off the past few days, I thought I'd send out a quick note with three short ideas I've been sharing in conversations with some of you today.
1. While predicting the future really is a fool's game it was pretty prescient of us to go through the Finametrica exercise over the past few months in anticipation of just such a market swoon. I'm glad we were able to confirm that your investment allocations are aligned with your personality/risk tolerance/goals before markets got jumpy. This gives us some peace-of-mind to ride through the current volatility.
2. US stocks closed at all-time highs one week ago. One more time: US stocks closed at all-time highs one week ago. Listening to the news today you'd think we've been in a multi-year bear market and stocks are down 50%. In reality, stocks are down 8% from all-time highs of one week ago, and up 12% from one year ago. Could we go lower still? Of course, and a 10-15% correction from the recent high would not only be uncommon but in fact healthy.
3. The Corona virus will have an impact on the US and global economy. Not doubt. Nike, Apple, and many other international businesses have already said as much. Whether this is a temporary impact (3-6 months) where demand is deferred until supply chains, etc are back up and running, or a trigger for a global recession lasting 6-12 months, remains to be seen.
So what should you do?
Above all else, don't try to time the market, it does not work. As an example, look back to Q4 2018, when stocks dropped 14% and many investors (but--thankfully--none of you!) panicked and sold, only to watch the market rebound to new highs in coming months. Investing is not gambling, but market timing is.
If you are not yet retired and you're building savings and investing, you are a buyer.Whether it's via paycheck deposits to your 401(k) or systematic savings to an investment account, you are buying. Naturally, as a buyer, you want to get the best value for your money. And naturally the best values are present when markets are unsettled and prices have declined. So as a buyer, you should view these episodes as an opportunity, particularly if we get to the -15% level on stocks.
If you are currently retired and living off your savings, you are a seller. When we transfer money to you every month or year, you're selling investments to get that cash. So as a seller, the dynamics are the complete opposite of those of a buyer: you do not want to sell low. In this case, if you're concerned about a further decline in stocks make sure the money you'll need over the next 12-18 months is in a safer asset like bonds or cash so you are not forced to sell stocks into a decline.
As always, if you have any concerns or questions please don't hesitate to call or email me. One of the most important parts of my job is to make sure you can sleep at night with the confidence that you'll achieve your financial goals, and I welcome the opportunity to fulfill that obligation to you.