I love it when we’re about to experience a weather “event” – and when did a snowstorm become a snow “event”? What does that even mean? But, I digress. It’s fun to watch the competing weather forecasters on local TV: which one takes his jacket off first, which one rolls up his sleeves first, when does she announce she’ll be in the studio all night just for us? And, don’t forget, run to Kroger and get all the bread and milk your arms can carry!
During 2018 the stock market has ignited the same kind of breathless commentary from the financial press. Rising inflation, a potential impending trade war with China and others, and potential military conflicts with North Korea, Syria and Russia have sent the stock market rolling like the Banshee at King’s Island. 2017 saw the market at its most docile in more than 50 years. In fact, during the year the S&P 500 didn’t move 2% – up or down – in a day even once. This year? The market has already moved more than 2% in a day seven times! Similarly, last year the market moved at least 1% only 8 times. We’ve seen that 24 times already this year. But, even after enough head-jolting to make an astronaut sick, the S&P 500 is only down a little more than 1% for the year. Yawn.
So, why am I concerned?
Because the last 9 years has essentially been a steadily-climbing Bull market with few ups and downs and I’m not sure people are emotionally prepared for when a Bear market arrives. Notice I say when, not if. Nor are many of them invested properly to blunt the effects of a market collapse.
Let’s face it, if you’re in your early 40’s you probably didn’t really feel the impact of the 2008 market collapse of 40% because you probably didn’t have that much invested then. So, it’s natural to assume that this investing thing is really quite easy. You automatically save through your workplace retirement plan – a 401(k) or a 403(b) – and watch it grow each quarter. Hey, I’m good at this!
Similarly, if you’re in your late 50’s or early 60’s and contemplating retirement, you probably do remember the 2008 collapse but now a decline of your savings of 40% might materially change your retirement plans. Are you invested properly for that?
Here is why this matters:
To use a round number, if you have $100,000 invested in funds that move with the stock market, a decline of 10% will reduce your investments by $10,000 to $90,000. However, after that happens the market must increase by 11.1% to get back to your original $100,000 – a 10% increase, or $9,000, won’t do it. Ergo, in the long run one will be better off if their portfolio doesn’t experience the full swings of the market but, instead, charts a smoother path.
So, what to do:
1. Diversify your portfolio. I know, you saw this coming. But, hear me out. You might be surprised to learn that many people believe diversification means having funds in different accounts. Their thinking may be that if their IRA declines, their 401(k) might not. That’s not diversification. Your portfolio is comprised of all your investment assets, wherever they may be held. True diversification, then, means holding some in mutual funds that invest in companies within the stock market and others in investments separate from the market, such as bonds.
Now, this is more difficult than it sounds. While your ultimate goal is to invest in some funds that zig when the market zags, how much should you put in each? Some experts believe that 70% of a portfolio’s performance depends on this asset allocation – how much is invested in stock funds versus bond funds, real estate, or international funds. At Moneywatch, we spend a lot of time analyzing the funds we recommend and how correlated they are to each other.
Overall, how your portfolio is constructed depends on your age, circumstances and personal goals and should support your financial plan.
2. Review your portfolio periodically and rebalance if necessary. Review the performance of your individual investments at least annually and compare their performance to their benchmarks. Don’t just select them once and forget them. Then, look at your entire portfolio again as a whole to evaluate whether each asset class – stock mutual funds, bond funds, etc. – is invested as a share of your portfolio the way you intend. As valuations fluctuate this asset allocation tends to get out of whack and you may be taking on too much risk when the market climbs or not enough when it has declined.
3. Finally, don’t panic or overreact. The financial media live for market volatility because it gives them something to talk about. Sell this or buy that is their equivalent of telling you to buy bread and milk. If your portfolio is properly structured to support your financial plan then it’s also built to weather the inevitable storms. If that’s the case, blow off CNBC and watch Homeland, much more entertaining anyway.
If you haven’t really looked at your portfolio as a whole – all your investment accounts – now is a good time to do that. You never know when that extra bread and milk will help you through the storm.