“Everyone has a plan ‘til they get punched in the mouth.” –Mike Tyson
What is your plan when the market eventually goes through a serious downturn, commonly called a bear market? Are you going to be able to follow through with that plan when you get “hit”, or will you react to the fear that grips you when your portfolio is declining?
It is very important to think through the above two questions. For our clients, the plan has two primary components: 1. Proper investment objective. Put simply, making sure your stock exposure is appropriate for your return objectives, risk tolerance, and risk capacity. It is your “guardrails” to help keep you from going off the edge of the road. 2. Broad and deep diversification. Diversification does not guarantee profits, nor does it ensure you won’t have a loss. Rather, it aims to reduce the likelihood such losses will be devastating, and potentially exposes you to different drivers of return.
But what happens when the bear begins to claw at your portfolio? Here are a few things to consider: - This is the time in the market cycle that the value of a good financial professional is truly felt. That advisor stands between your emotions and the big mistake you are about to make. For many people, this is by far the greatest benefit of having a trusted financial advisor. Reacting to markets based on fear and greed has likely hurt investors far more than all other factors combined. - If you are young, retirement is many years off, and you are contributing to your 401(k), a bear market is actually welcomed, not feared. It gives you an opportunity to buy more shares at historically lower prices. - If your goals, however, are closer on the horizon, then buy and hold may not be the best option. Keep in mind that the S&P Composite at its peak in 1929 not only fell 89%, but also took until 1954 before it broke even. That’s 25 years! Even in recent history, the NASDAQ index took 15 years to break back above its 2000 peak. Can you handle that? But what are the options to buy and hold? Here are two to consider: - Rules based selling system. A strict set of selling rules not based on emotion can often help reduce the downside of a bear market. - Outsource the risk. Sometimes having investments that provide some sort of principal or income guarantees are worth the inevitable high fees and restrictions they entail.
Contact your wealth manager to discuss these ideas and prepare for the inevitable “punch in the mouth.”