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Wall Street has gone wild! Is it finally time to change your investment strategy?

Wall Street has gone wild! Is it finally time to change your investment strategy?

It’s a strange time for investors.

Consider this: Just last week Gerry, a 65-year-old recent retiree, asked me if she should take on more risk in her portfolio. “The market is doing so well,” she said. “I feel like I’m missing out on all that growth.” My answer was simple. “No!” I explained that her strategy had been very carefully built to support her long-term financial goals—not just to grow her invested funds. It was an important conversation, and wow, is it a good thing she has an advisor to talk her out of emotional decision-making! Just imagine if she’d decided to gamble with her assets and take on more risk just a few days ahead of Monday’s volatility.

Of course, in the face of this week’s rather wild ride in the stock market, you may be asking yourself the opposite question: “Have I taken on too much risk?” My answer to you is the same today as it was for Gerry just one week ago. No! That is, of course, if you have a well-constructed financial plan already in place.

Whether the market is flying high or taunting your emotions with new lows and some bumpy volatility, here are four things every investor should keep in mind:

  1. Investing is not a stand-alone activity.  When the stock market is in the news (which it almost always is), it’s easy to forget that investing is just one piece of your overall financial life. A good financial advisor will work with you to look at that and everything else. What are your goals? What does your personal balance sheet look like? If you haven’t already, how soon do you plan to retire? How long can your existing portfolio provide a reasonable income? How much debt do you have? Do you have a sufficient emergency fund? The answers to these questions determine how much risk you can afford to take when investing. When a new client tells me she only wants to talk about investments and not the rest of her financial life, I know we have some important work to do! (Learn more about focusing on your financial big picture in my blog, Cold, hard cash! (Are you paying attention?).
     
  2. A balanced portfolio will rarely perform as well as the DJIA—or as poorly.  The Dow Jones Industrial Average (DJIA) is an average comprised of just 30 stocks out of a universe of thousands. In contrast, your portfolio includes a diverse menu of different asset types that each play a particular role within your portfolio. Stocks address your need for growth. Bonds address your need for stable income. Cash addresses your need for liquidity. How those assets are balanced—or allocated—in your portfolio depends on how long it will have to serve as your retirement paycheck, how much you’ll have to draw each month to sustain your lifestyle, how many years your assets have to grow, your legacy goals, and more. If your IRA goes down as stocks go up, don’t despair. Rest assured that your portfolio is balanced and diversified to meet your needs.
     
  3. Your best investment in any market is to pay off debt.  Debt is a huge problem in the US. According to this study by WalletHub, the average indebted household held $8,600 in outstanding credit card debt in 2017, and total household debt broke a new record of just under $13 Trillion.[1] If your portfolio is what makes your financial life secure, debt is what does the opposite. While “good debt” such as a home mortgage, student loans, and business loans generate benefits over time, “bad debt” poses serious risk to your financial health. Credit cards, auto loans, and other revolving debt reduce your income, add no value to your wealth, and force you to pay more every month for an item that is losing value. If you are carrying bad debt, use a debtsnowball to reduce and eliminate the debt you have today and avoid taking on more debt in the future. (For more on how debt can impact your future, read my blog There’s no such thing as an unexpected expense.)
     
  4. Your goal is to make work optional and sleep peacefully at night—not make as much money as possible.  It’s so easy to forget the endgame. We see the stock market hitting record highs or taking record dives, and it distracts us from the real goal of financial planning. Ultimately, everyone wants to have enough assets to support themselves and their family comfortably for the rest of their lives. While the definition of “enough” varies widely (check out John C. Bogle’s fantastic book, Enough: True Measures of Money, Business, and Life, for more on that important topic), a comprehensive financial/life plan can remove money stress by giving you the confidence that work will be optional someday and you can sleep peacefully knowing that your finances are secure today and tomorrow—independent of market volatility.

I have a colleague who likes to joke that he has the gift of “20/20 hindsight.” Don’t we all? It’s so easy to say, “I knew it all along!” Knew that the market was overvalued. Knew that you should have held on to Apple stock. Knew that your friend’s new boyfriend was a creep. The truth is you didn’t know it all along; you only feel as though you did now that the outcome is in plain sight.

No one—not even Warren Buffett—knows which way the stock market will go tomorrow. One thing we can anticipate is that we may have returned to more “normal” volatility. After years of historically low volatility and record highs, it may feel a bit unfamiliar, but with a solid plan in place, you can trust that you are safe. If you’re not certain you have a smart plan that’s working toward your long-term goals, let’s chat. As always, we’re here to help.



[1]The Center for Center for Microeconomic Data, Q3 2017

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Volatility, escalators, and yo-yos

b2ap3_thumbnail_underactive_escalator.jpgEarlier this month I spoke to a group of women on choosing to choose (the brief version was included in my July 28 blog), yet in the question and answer session, I was asked the inevitable: “Is the market going back up?” My answer: “Yes. Absolutely. Without a doubt, yes!”

If there’s any doubt in your mind about how I can be so emphatic with my answer, it’s probably because the recent market volatility has you, like many others, feeling like you’re on an emotional rollercoaster when it comes to your invested assets. Here’s why I’m not worried:

Volatility is, literally, the up-and-down movement of the market caused by investor sentiments that drive trading activity. Technically, volatility is measured by the standard deviation from expectations, or “normal” market movement. “Normal” is about 5.8% a month and 20% a year. That’s not much change, especially on a daily basis, and we get happily used to those nice, tiny fluctuations. But just like when we’re riding on a real rollercoaster, those little bumps aren’t so bad—it’s the monstrous drops that make our stomachs turn over!

As we’ve seen recently, volatility causes downward stock price pressure as anxious sellers drive down market prices. The current sell-off is being driven by amorphous fears about a slowdown in global growth. In the early 2000s, the cause was poor earnings and devaluations of tech companies. Then came the turmoil of 9/11. In 2008, it was the financial crisis. More recently, Greece and China have been the culprits. Each of these events brought uncertainty, which spurred volatility, which created fear. Of course, fear then impacts the market, which creates a vicious chicken-and-egg situation. The bank rush of the 1930s is a great example. Some banks collapsed, and the fear of more failures caused a run on the banks. Were all banks in trouble? No. But people who had their money in the institutions that did fail lost all their savings (deposit insurance didn’t exist at the time), and that fact caused widespread panic. Clearly fear—especially when it comes to money—can be much more contagious than any plague. The good news is that uncertainty eventually passes. Each crisis, whatever it may be, resolves itself one way or the other. Fear dissipates. And volatility levels return to normal. For investors, the most important thing to remember is that market volatility is temporary while the overall movement of the market is long-term.

Dan (an acquaintance, not a client!) was one of many who let fear drive his decisions back in 2008. He pulled everything out of the stock market to “cut his losses.” His plan, of course, was to put his money back in as soon as things returned to normal. But Dan’s strategy had a major flaw. Now, at the end of a seven-year bull market, Dan asked me if it’s safe to get “back into the market?” My answer, of course, is that investing requires discipline and education. And that if he thinks he has the skill to “speculate” on price fluctuations, well…he’ll likely end up on the wrong side of every trade. If Dan would only take the time to understand investing and the story of the escalator and the yo-yo, then he’d be ready to be a wise investor.

Picture it: you’re on an up escalator playing with a yo-yo. The yo-yo is going up and down on a small scale, while the escalator is going one way—up—on a large scale. Yes, the yo-yo continues to move, but it (and you) continue to move in one direction: up! Now imagine the yoyo is market volatility, and the escalator is the market itself. Even if you’re a really bad yoyo-er (like me) and the yo-yo falls all the way to the end of its string before you wrap it back up again, you’re still continuing to move in the right direction.

Martin Brower is considered by many to be a real estate expert in Orange County. A former Irvine Company exec, he currently writes the column Along the Coast in Orange County’s Coast Magazine. As an expert, he’s often asked, “where is the real estate market headed?” I’ve heard Martin answer, “I don’t know where it’s going, but let me tell you where it’s been.” He then tells his own story of the Westchester home he purchased in the 1950s—what he paid then and today’s price. He didn’t talk about yo-yos, or the collapse in 2008, but he did point out that the trend is clearly up and the change is exponential. Over time. The lesson learned is this: As an asset class, real estate is good, but it’s no greater than any other asset class. The perceived over-performance is the result of the typically very long hold period associated with home ownership. Holding on to your investments—whatever they may be—is the key to long-term success.

So yes, the yo-yo has been going up and down for weeks now. And just as it started to settle down, the Fed opted not to raise interest rates. So we’re back in yoyo territory. But just remember that the escalator is still going up. Maybe not as quickly as we’d all like, but that movement, over the long term, will eventually get us where we plan to go. And if you need a small daily reminder to keep you smiling, just print out a copy of this old newspaper I came across the other day and imagine what a fortune those who invested in 1962 have today—as long as they stayed put and ignored the yo-yo. I hope you’re one of them!

b2ap3_thumbnail_1962-Dow.jpg


Still wondering how the yo-yo will affect your long-term outlook? Email me to schedule a time to chat. As always, I’m here to help.


 

 
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All written content on this site is for information purposes only. Opinions expressed herein are solely those of Lauren S. Klein, President, Klein Financial Advisors, Inc. Material presented is believed to be from reliable sources and we make no representations as to its accuracy or completeness. Read More >