The stock market kicked off September by delivering a long-anticipated dip, so I wasn't surprised at all to read this note in my inbox early Friday morning from a long-time client:
"I'm sure I'm not the only client who's a little skittish about the future,
but I am aware of just how crazy things have been—and will be."
Are you, too, feeling skittish? Does the pending market correction feel like a cliff instead of a speed bump? Do you lay awake at night envisioning your carefully constructed retirement plan imploding into the darkness? If so, you’re not alone. Things really have been crazy—and they will continue to be. But putting today's market reality into perspective can help relieve your angst. Here are three facts to help get your thoughts out of your gut and back into your prefrontal cortex where they belong:
- The best way out is through.
The S&P 500 ended the first week of September down 2.3%, and the Dow and the Nasdaq fell 1.8% and 4%, respectively. It didn’t feel good. Taking a step back, however, it's easy to see that investors who have stayed the course are continuing to reap rewards. In the past 52 weeks, the S&P 500 has risen from 2,191 to Friday's close of 3,427—and that was after the late-week dip. That puts the index up 37.10% since this time last year. Five years ago, the index was sitting at just 1,921. And even though it dropped a couple of times along the way (to 1,810 in early 2016, and to 2,304 at the start of the US shutdown in March), the long-term view paints a clear picture of slow and steady growth:
- Consider the 'worst case' scenario.
It's no fun to see the value of your nest egg drop overnight. We've all been there. We saw it when the tech bubble 'popped.' We saw it in September of 2008 when the financial crisis took hold. During both crises, investors learned that the most dramatic market fluctuations were temporary. The world keeps turning, businesses keep growing, and investors are rewarded when they hang on through turbulence.
Understanding how market fluctuations affect your plan can help you see past each inevitable market cycle. A portfolio stress test can be used to assess what a decline in market prices (even the worst-case scenario) means to your portfolio. Luckily, the real impact is usually much less dramatic than it feels in the moment. Why? Market dips are actually a good thing, allowing you to use dollar-cost averaging to add to your portfolio when stocks are 'on sale.' And when you are retired and taking distributions from your portfolio, as long as you have an investment plan with a carefully constructed income strategy (which, if you're a client of ours, you do), you have a margin of safety throughout the business cycle.
- You can’t spend it until you convert it to cash.
No matter how badly you need cash on a given day, you can't sell your house at 2:00 that afternoon and suddenly have a spendable asset. That's because your house is not a liquid asset. Unlike real estate, liquid assets can be converted to cash quickly and easily without experiencing a change in value. The best example of a liquid asset is cold, hard cash.
When we design your portfolio, we consider your need for liquidity based on your age, your goals, and your sense of optimism, confidence, or fear. We then build a 'liquidity ladder' to ensure you have the cash you need, when you need it, so you are not a forced seller in down markets. With these guardrails in place, you can sail confidently through market fluctuations.
A word about uncertainty.
Uncertainty is a constant—in life and in investing. But how well each of us is able to tolerate uncertainty is very personal. As a planner, my role is to help smooth uncertainty by mitigating the impact of loss while optimizing the opportunity for gain. But if uncertainty is something you can’t tolerate, there are ways to invest with a higher degree of certainty. Treasury Bonds are one example. The downside, of course, is that risk and reward are related. The current return on a 10-year T-Bond is a paltry 0.7%, compared to the S&P 500's return on the 10 years ending June 30, 2019, which was 14.7%. In short, if you want to get paid well for being a capitalist, getting comfortable with uncertainty is key.
Feeling skittish is human. From a financial perspective, the best way to rise above this feeling is to create a plan, stress test that plan, and construct ‘guardrails’ to protect you from risk. Doing so will allow you to feel confident in all market cycles—even when the market takes a dive—so you can sit back, relax, and breathe. If that’s not where you are today, let's schedule a time to chat. I'm here to help!