Market gains from 2018 have been wiped out. Interest rates continue to rise. The US dollar is strong and is impacting foreign markets. Then there are fears of a trade war and continued political uncertainty. No wonder why the market is sliding!
Although the causes of our current downturn are different, many investors have experienced this before and we all know how it ends. Those who panic, listen to misdirected advice, and make poor choices don’t fare as well. But those who have a sound, long-term plan are usually able to ride it out and do OK.
So how do you develop your long-term investment plan to ride out this and future market downturns? Here’s one way we address it.
1) Do your best to separate your emotions from your investment decisions. Our emotions are probably telling us to sell when the market drops, then when we see news of new highs and returned optimist, get back in! This is the polar opposite of what we should be doing (buying low and selling at a relative high). Having a sound, long-term investment strategy that plans for the possibility of a market downturn will help you stay the course even when your stomach is in a knot.
2) Keep things in perspective. Market fluctuations are part of investing. The markets go up, then they pull back a bit. They go up, and pull back and on and on they go. The timing of the drop, just how far it goes, how long it stays down and how quickly it rebounds are the variables that no one can predict. We have seen downturns like this in the past. Some were much worse. Yet over time, the markets rebound and those who planned to ride out the tough times are often rewarded by gains once the market rebounds.
3) Have a long-term plan and invest with purpose. Trying to outsmart the market is a loser’s game. Nobody has been able to consistently predict market downturns. Nor have they been able to jump back in at the lows and foresee the timing of the rebounds. So if we can all agree predicting the market is impossible, then we need to PLAN for market fluctuations and invest with purpose. Here is how we approach this important task.
- First you need to determine when you may need to access funds from your investments. Then you need to determine just how much you may need from your investments. This is done be outlining your financial goals and determining how much your continued work, social security, pension and other income sources will provide. If they solve for all of your income needs, then you might not need to tap into your investments. If your income sources don’t provide for everything you will need, you need to plan for how you will access funds from your investments.
- Create your short-term bucket (bucket 1). Now that you know when you might need to tap into your investments and roughly how much you may need to take, make sure that the amount that you may need to take out is not exposed to any market risk. Using options such as cash, short term CD’s or fixed accounts can provide the stability and liquidity you need from this short-term bucket.
- Mid-term money (bucket 2): Assets and investments that you don’t need right now, but might need in say 3-8 years can be invested in a wide variety of ways. They don’t need to be quite as conservative as your short term money. But they also shouldn’t be invested in the stock market in the event we fall into a bear market or recession and the value of those investments are down when you need them. The amount you have in this bucket and the options you use will depend upon your risk tolerance, how quickly you will be tapping into your assets, the types of investments you have available to you, any foreseeable changes to your income needs and the overall size of your portfolio.
- Long-term money (bucket 3): This is your growth engine. These are dollars that you have invested that you don’t anticipate needing for quite a while. It would be these dollars that are sliding as the market pulls back. And if you have planned for your short and mid term needs, it may allow you to decouple your emotions from your investment decisions and allow these holdings to ride out the periods of negative returns. It’s also important to note that this long-term portion of your portfolio should be well diversified. Proper diversification helps limit downside risk and volatility.
Over time, you would monitor your portfolio, watching over your “buckets” and ideally harvesting gains from buckets 2 and 3 to replenish what you’ve taken from your bucket 1.
The amounts that you should have in each “bucket” depends on a number of things and is specific to you and your situation. Your risk tolerance and other sources of income (continued work, social security, pension, sale of other assets, etc) all come into play.
Taking the time to understand how much you may need from your investments, when and where best to take that income from is a valuable exercise. If you want to review your long-term investment plan and discuss how your investments and retirement planning may be impacted by a market downturn, please feel free to reach out to your team. We would be happy to review your plans, sources of income and holdings and help you develop an investment plan to weather these turbulent times.