Make your plan, work your plan, and plan for the unexpected
Unless you live under a rock, I think it’s safe you say you’ve noticed stock markets around the world have taken a significant drop recently, highlighted by the Liberation Day tariffs President Trump announced last week. While many of the pundits are eager to argue the merits of tariffs and the overall strategy of the president, I don’t think that helps the average investor in America cope with the shock of seeing their net worth, on paper, drop roughly 10% between Thursday and Friday of last week.1 And just in case you may have had a healthy response to the drop, the news outlets seem to be putting in their best efforts to fix that! Here are a few slightly inflammatory responses just in case missed them:
“Bill Ackman likened the tariff move to an ‘economic nuclear war'”
“Boaz Weinstein warned of an impending ‘avalanche’ in markets and rising bankruptcies, drawing parallels to the Great Depression-era Smoot-Hawley tariffs”
“Brad Gerstner described Trump’s tariffs as a ‘nuclear-style attack’ on global trade that threatens to tip the U.S. into a severe and lasting recession”
All three of these unconstructive responses put in a strong effort to influence investors, especially retirees, that we could be on a one-way street to a massive recession, if not The Great Depression 2.0. In reaction to their quotes, I’ll quote the great philosopher, and former Green Bay Packers quarterback Aaron Rogers, “R-E-L-A-X”. In my opinion, it’s a bit much to suggest such doomsday scenarios, especially if you are a notable influential investor, because while you may not be intending to give actionable advice to anyone listening to you, that doesn’t mean that at least some investors won’t act, and that could severely impact their ability to recover from losses.
We believe market timing is a serious gamble because you have to be right twice, when to get out, and when to get back in. Well, Since 1980, if you missed the best 50 days in the market, you had a total return of 760%. Not bad, right? Wrong. If you missed only the best 30 days, you had a return of 1,864%. Now we’re talking, right? Wrong again. Ok, Let’s assume you only missed the 5 best days, which gave you a return of 7,387%. I think by now you know that’s not the winning ticket, so to let’s just skip ahead to what would have happened if you left the money in the market the entire time. If you did that, you would have had return of 12,136%. Let’s all take a pause and let those numbers sink in. Seriously, please, stop reading for a second and really think about what impact that would have on your finances.
Ok, let’s move on to the next reason to freak out; That notorious five-word phrase to justify any action in the face of uncertainty, “It is different this time.” Sure, it’s a different catalyst, as it always is, but does that really make it any different? Let’s take a walk down memory lane for a minute. October 19th, 1987, “Black Monday”, the market was down 20.5%. A year later, it was up 23.2%. October 14th, 2008, in the heart of The Great Recession, the market dropped 9.0%. A year later, it was up 20.8%. March 13th, 2020, Covid 19 is hitting, governments are shutting down the global economy, and with it, the market goes down 12.0%. A year later, It’s up 66.1%. So, are the tariffs really any different or more significant than the aforementioned times? Maybe, but in my opinion, probably not.
I think this is where I’m supposed to give you the standard financial advisor response that goes a little something like this, “Markets go up and down. That’s normal. We are long term investors and the worst thing you can do is sell at a time like this. We need to be calm and wait for the markets to come back.” Wow, even writing that makes my skin crawl. It’s not bad advice, in general, but I think we owe our clients a more thoughtful and logical explanation about why they, individually, should believe that advice. Let me take a shot at giving you a reason to believe me.
- Consult your financial plan
- Your financial plan is the baseline from which all financial decisions should be made. If done correctly, it is a real time financial GPS navigation system that let’s you know exactly how you are trending towards all your financial goals. You should be able to access your plan to get a real time update, taking into consideration any market turmoil, of whether you are still on track for the life you’ve been planning.
- understand your liquidity Strategy
- How can you access cash, if you need it, and for how long, during any market conditions? This is typically the real concern most clients have during times of uncertainty. It’s not that people don’t generally believe in the long-term prospects of investing, but rather, the fear of what if they need money now. Your liquidity strategy should start with some kind of emergency account. This can be things like cash, money market, or CDs. Though not recommended to be your only emergency access to liquidity, a home equity line of credit may be a good backup plan. If you take stock of your emergency account and still find yourself uncomfortable, this is a sign that you may need to increase the money allocated here. For retirees, it’s paramount that you understand your retirement income strategy. Do you use a flooring strategy to right size the amount of guaranteed income coming in every month? How do you access income for discretionary spending? Is it a systematic withdrawal, or buckets strategy? Knowing where you can access cash and how you are going to receive income may go a long way towards calming fears when the markets are down.
- understand your investment risk
- Do you know how much risk you are taking with the investments in your accounts? If you are nervous about how your accounts have fallen over the last week, I’d argue you need to know that answer. Are all of your accounts invested the same way, or do you have some accounts that are more aggressive than others? Knowing the answer to these questions may help explain why different accounts may have different performance reactions to various market conditions and better help you understand what realistic expectations should truly be when the market goes up, or down.
- look for constructive opportunities in down markets
- Even down markets provide opportunities for investors. Here are a couple things you might consider doing:
- Rebalance – this is a simple action that can make the rebound happen more quickly
- Buy on sale – when things are cheap, you can buy more for less, especially if you have a long-time horizon. Consider not buying all at once, but instead buying in incremental amounts to spread your timing risk
- Tax loss harvesting – – look for opportunities to sell losers and replace them temporarily (or permanently) so you can lock in the losses while you remain in the market.
- Even down markets provide opportunities for investors. Here are a couple things you might consider doing:
Alright, there’s my attempt to share a constructive process by which to access your financial situation during unpleasant market conditions. I believe that for most clients, if you can understand how the current environment has, if at all, impacted your long-term financial standing, how much cash you have access to in case you need it, and the rationale for how your money is invested, wading through choppy markets with a healthy, long-term, mindset is a lot easier to do. As I said earlier, rarely is the issue that clients don’t believe in the long-term potential of the stock market. Usually, the issue is just understanding how the current environment affects each of them on a personal level. And that is a very rationale reaction.
If you need help understanding your financial plan, how much money you have access to, or why you are invested the way you are, please feel free to reach out to anyone on our team. Even if you are not a client of ours, we’re happy to help you answer your financial questions.
Healthy plan, wealthy life.
Sources:
YCharts / Business Insider / First Trust slide deck
