Are You Prepared for a Stock Market Correction?
We're six years into a surging bull market in U.S. equity markets. Bull markets usually last five to seven years. The stock market is valued above its historical average. We're due to have a correction in the stock market. Will it happen in August, September, or next year? Nobody knows.
It's important to be prepared for a correction. I'm going to talk about how we do that from a portfolio standpoint, and just as importantly, how we prepare for that emotionally.
Managing risk is our most important priority. The way we do this is by choosing an appropriate asset allocation (i.e. the percentage in stocks vs bonds) and by populating that allocation with the best components.
I've met a lot of families this year that were taking way too much risk. They had 80% OR MORE of their portfolio invested in stocks. This has provided great performance for the past few years but we're in a low return environment for stocks and for bonds in the short-term. Our economy is growing at 2%. Interest rates are near 0% and intermediate bond yields on treasuries are at 2%. The Federal Reserve is contemplating interest rate increases, which is a challenging environment for stocks and bonds.
The most important thing we do for our clients is select the appropriate asset allocation. We employ a globally diversified approach. Once we have established the correct amount of risk, we populate the portfolio with high quality components. We use low-cost index funds with minimal trading costs. Our individual stock strategy focuses on high quality, attractive valuations, and positive momentum. When the market corrects, these stocks will lose value with the overall market, but they tend to recover more quickly than the rest of the market does. We use the best actively managed no-load mutual funds on the planet. Their ability to find value in the bond market, wherever it exists, is time-tested and proven.
It's important to decide NOW how we're going to behave when the stock market correction begins. We need to be emotionally prepared for this eventuality by deciding today that we're going to ride it out. We're not going to give in to the temptation to make big adjustments like going to cash or to trade excessively. I've met a lot of families that did not employ this strategy during 2008 and 2009 that experienced disastrous results. I spend a lot of time encouraging our clients and coaching them during these market conditions and they weathered that storm brilliantly.
How we behave in a down market has a HUGE impact on our long-term performance. Designing the allocation, using great components, and staying the course are the keys to success. If you're contributing to a 401k, continue putting that money in the market. You're getting more shares for your money and you'll be much better off in the long-term.
Write this down:
1. My allocation is appropriate to accomplish my long-term goals.
2. My components are the best in their respective asset classes.
3. I choose to stay the course. I will not allow short-term fears to jeopardize the likelihood that I will attain my long-term goals.
If you're unsure about those three maxims than give me a call and I'll help you out. There is too much at stake to let your emotions derail your financial future.