By Gary Cassell
This is the time of year for New Year’s resolutions and stock market predictions. But the difference between the two is this: We don’t have control over the stock market like we do with our habits. Year after year, the markets throw surprises at us. Case in point: At the end of 2018, many experts thought the S&P 500 would grow by only 5%, (1) but as 2019 drew to a close, the S&P 500 was sitting at a 29% gain. (2)
So whether or not we experience a downturn or even just a slight decline and increased volatility in 2020, the question you should be asking yourself is: Will I be ready? Here are a few solid principles to help you prepare for the next market downturn, whenever it comes.
Keep Your Eyes On The Prize
One of the most important rules in investing is to refrain from making short-term emotional decisions, especially near market tops and bottoms. Multiple studies have analyzed how our emotions affect our investing results, especially when we chase above-average returns, also known as “chasing the hot dot.” A 2018 DALBAR study revealed that investors’ decisions were the biggest reason for underperformance. (3) Simply put, behavioral biases lead to poor investment decision-making. The key is to utilize an investment strategy or a combination of strategies. Not only does it help you to stay disciplined it can help to manage risk also.
It’s easy to get swept away emotionally when the market negatively wreaks havoc on your finances and the news headlines are spouting warnings. But if you stay true to your investment strategy and avoid making sweeping decisions when emotions are running high, you won’t run the risk of losing even more. As long as you have created a disciplined financial plan and are adjusting your portfolio regularly, you are doing your part to prepare. Your number-one priority should be to protect your principal, so don’t gamble with your investments at times when the market is struggling.
Diversify Your Portfolio
You’ve heard it a thousand times, but that doesn’t make it any less important: Don’t put all your eggs in one basket. But as you get closer to retirement and face a downturn, it’s even more important to make sure you are investing in the right types of holdings. This means not only diversifying between stocks, bonds, and funds, but also among different investment strategies. In this way, you can attempt to minimize the negative impact to your overall portfolio.
Rebalancing is one key factor in keeping your portfolio safe. It’s not enough to create proper diversification and just walk away. You need to regularly analyze your portfolio to ensure that it still reflects your appropriate level of risk and that you haven’t become too reliant on any one asset category.
Diversify Your Income
A comprehensive retirement plan involves more than simply making the right investments, it’s about doing everything possible to avoid dipping into your accounts prematurely. Economic downturns often go hand in hand with job instability. So, in addition to diversifying your investments, consider diversifying your income sources as well. Besides your salary, consider where other sources of income can and will be coming from. This might mean investing in rental real estate or other income-producing investments such as higher-yielding stocks and bonds, picking up a side job, starting your own small business, or making money online. The more diversified your income, the safer you’ll be.
Create An Emergency Fund
This strategy is all about preserving the wealth you’ve accumulated to this point. While cash investments may not provide a lot of growth, having a cash contingency fund with at least six months of living expenses will protect you against having to sell investments at low values to free up cash. Examine spending patterns and find ways to tuck away even more into cash or cash equivalents, such as short-term bonds, certificates of deposits, or Treasury bills.
Make A Plan
The only long-term guarantee in investing is that there will be short-term fluctuations. We’ll experience bear and bull markets in the decades ahead just as we have in the past decades. Rather than fear change, focus on preparing for it.
The best way to keep your portfolio safe is to have a solid financial plan in place, a plan designed by professional advisors trained in navigating through tough economic times. If you want to make sure your portfolio is set up to weather any market environment, we can help. Take the first step by calling us at (636) 532-7337 or scheduling a consultation using our online calendar and start 2020 with financial confidence.
Gary Cassell is president of Premier Wealth Advisory Services, an independent, fee-only wealth management firm. With over 25 years of experience in the financial industry, Gary is passionate about helping families, business owners, and executives live their lives by design, not by default, through personalized wealth management and unparalleled service. Gary earned a bachelor’s degree in physics from Hastings College and is a long-time resident of St. Louis, where he lives with his beautiful wife and two wonderful children. When he’s not working, you can find Gary spending time with his family, hiking, playing tennis, walking, and brewing beer. To learn more about Gary, connect with him on LinkedIn.