Crafting a long-term investment strategy is rather easy when markets are calm, you are secure in your job and things are generally going ok with the health and wellbeing of you and your family. It’s when the market gets volatile and the economy dips into recession when confidence in our financial situation can be shaken. When a family member experiences hardship or illness, well that adds a whole new layer of stress. What should you do?
Know that market turmoil comes with the territory of owning stocks. It just does. Some ‘advisors’ out there may pitch strategies that promise products that can’t lose money. If it sounds too good to be true.. you know the rest of that phrase. The good news is, and during harsh bear markets this does not provide much solace, markets always come back. Individual companies may not, but a diversified, low-cost, dividend-paying portfolio has a remarkable history of resiliency.
What also makes investing difficult at times is that stocks are the best deal when the headlines are absolutely dreadful. It is counter-intuitive. The best time to buy the market is usually when unemployment is spiking, companies are going bust, and other investors are panic-selling. Buying when everyone else is selling is easier said than done, but that is why we craft an investment policy statement that outlines our risk tolerance and long-term goals. Having a strategy on paper is like a contract we can reference when times get uneasy.
The stock market declines upwards of 30% or more about once every 5 or 10 years. Without risk, there are no gains to be had. The typical bear market happens every 5-10 years. They last about 10 months and see the stock market drop by 35%, again on average. The silver lining is that while the normal decline is more than 30%, the typical bull market features a gain of a whopping 110% to 120%! Throughout history, the markets are rising about 75% of the time. It’s that un-nerving 25% of the time when we have to remain calm and stick to the plan.
What makes periods of economic and stock market crises more difficult is that your job could become at risk. It’s not that hard to continue investing in your 401(k) when your job is safe & sound, but if your company’s industry is one at-risk during a recession, the natural response is to raise cash and avoid risk. So you may miss out on some of the best stock market deals. This too is why we have an investment policy statement. Having an adequate rainy-day or emergency fund at all times is important. It’s not market-timing; it’s risk management.
Sleeping at night is important. If you need to sell a portion of your stocks and buy bonds, that is ok. We can talk about it, and perform the transaction in the right type of account at the proper time. Scratching that itch to act may not be the best strategy on a spreadsheet, but financial plans are not lived-out in Excel. What else can ease stress? Enjoying time with your family & friends. Go out for a walk with your family. Exercise. Sometimes the worst thing you can do is turn on the evening news as that can only cause more anxiety.
The financial markets and your 401(k) & IRAs are one thing, but what happens if a family member goes through financial hardship or sickness strikes? Insurance is a key piece of a financial plan. It is important that we craft a risk management strategy and review it periodically. There is no getting around the emotional toll caused by seeing a loved one in pain, but we can act now to prepare on the financial side. Just know that TFC is here to make your financial life more at ease.
Here’s the point
- Market volatility happens time and again. Expect ‘bear’ markets, stock market declines of 20% or more, every few years.
- While we cannot control the market, we can take steps to control our behavior – having a living investment policy statement is important.
- We focus on risk management here at TFC. A rainy-day fund and utilizing tools like appropriate insurance policies are good financial strategies to prepare for hard times.
- Enjoy life. Have fun with your kids and spend time with your spouse. Give your friends a call to catch-up on life.
Action items
- Let’s review your investment policy statement to make sure everything is up to date.
- Talk it through. When you are feeling uneasy during periods of market crisis, just talking about what is on your mind helps.
- Get outside & enjoy life with your loved ones. Don’t constantly watch the talking-heads on the news or read every social media post.
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