Prepare for the 'Bear'
The Dow breached 20,000 for the first time last Jan. 21, then closed above 21,000 on March 1, surpassed 22,000 for the first time on Aug. 1, reached 23,000 on Oct. 17 and on Nov. 30, it sprinted past 24,000. Businesses continue to report strong earnings, often exceeding expectations. Growth is not limited to the U.S. Emerging markets are seeing record breaking returns as well.
Historically, the U.S. market has experienced a 5 percent reversal every 7.2 months, and a 10 percent downturn every 26.1 months. Our current bull market has lasted 105 months or nearly nine years, and is just a handful of months away from the longest bull run in the history of the S&P 500 (Bob Veres, Inside Information 12/2017)!
What is an investor to do? My experience is that most investors behaviorally are driven to do one of two things. Either chase the performance and add additional risk to the portfolio or fear the worst is around the corner and move towards cash and bonds. In my opinion neither of these is a good idea. As an investor, you should not only have a portfolio of stocks and bonds, you should have a corresponding financial plan that aligns your goals to your plan. No changes should be made to your portfolio without considering how these changes will impact your financial and personal goals.
Many investors’ biggest concern is to make sure they don’t run out of money. Chasing the highest possible return regardless of risk can severely disrupt your cash flow when a bear market appears. Similarly, bailing out of the market and moving to low yielding bonds and cash will severely decrease your risk and growth opportunity, limiting your portfolios upside potential and, ultimately, your future cash flow.
Individuals in retirement who are drawing income from their portfolios should make sure their portfolio is well balanced, diversified, aligned with their short and long term goals and has adequate liquid reserves—a year’s worth of income. The key is to have enough cash on hand so you are not forced to sell stocks at the bottom in order to fund your distribution needs.
For individuals still working and saving; you have seen this movie before. The black swan, the financial crisis, the mortgage crisis, the worst bear in recent history. We all have a friend, family member or client who went to cash or invested everything they own in gold, let’s just say - the movie didn’t end well for those folks. In my opinion, staying invested, managing cash flows and taxes, developing and maintaining a financial plan is the formula for success, no matter the market cycle.
Will it be a Kodiak sized-bear or a sweet little koala? Will the bear hang around for days, months or years? None of this can be predicted but all of it should be expected and your portfolios should be designed to withstand their presence. When the downturn comes, it will feel like all downturns do -- like every day you are losing money. You will be impatient and want to do something, which means deviate from your plan. My advice to you is - stay strong, gain comfort from the fact that you have a plan (and if you don’t have a plan - get one!) that is positioned in alignment to your goals…then sit back and enjoy the ride!
Stephanie Mackara is a Daniel Island resident and is president of Charleston Investment Advisors, LLC. Diversification neither assures a profit nor guarantees against loss in a declining market. All investing involves risk. Principal loss is possible. Charleston Investment Advisors, LLC is part of The Wealth Management Alliance LLC, a registered investment adviser.