The Markets are at all-time highs in this almost 9 year bull market. The natural question is “how long will it last?” Short answer – nobody knows.
A market correction will happen, that is not in question. So, what should you be doing to prepare for when it happens? That answer is a delicate one.
What do we know?
Let’s start with what we know. March 2009 brought the bottom of the “Great Recession.” Since then, the Dow Jones Industrial Average rose from a low of 6,547.05 to over 26,000. This is the third longest bull market ever in US equities. Regardless, it has been one of the least loved as well. Non-stop news and political turmoil have certainly cast their shadow. The facts, however, remain the same. We are in rare air.
What are the concerns?
Naturally, many surmise the bottom is going to drop out. Assume it is not a matter of “if,” but “when.” In reality, there is some truth to markets having negative years. In fact, 27% of the time the S&P 500 is negative.
As you can see from the chart, most down turns last under a year. The really bad ones though can linger for a couple years. But, they are few and far between.
Understandably, if you are trying to live your retirement off your investments and we head into one of these drawdowns you’d be very concerned.
What is the solution?
- Review Diversification.
For starters, sit down and review (preferably with a professional) your objectives. If you are in (or close to) retirement, it’s important to solidify diversification amongst different asset classes. This will lessen the impact any one sector can have on your portfolio. Remember, retirement is about maintaining, not finding the next hot thing.
- Risk Tolerance.
Once you’ve affirmed your balance, decide on your risk tolerance level. Although the stock market has a permanent trend upwards, the road there is winding. It is important to recognize what volatility you can or cannot handle. The biggest mistake people often make when investing is acting on emotion (rather than logic).
- Appropriate Assets.
Now, you have a properly diversified portfolio and it aligns with your risk tolerance. What next? Make sure you have the appropriate amount of assets in the more secure asset classes (bonds, etc.,) to last you through a down turn. For instance, let’s say you have a million dollar portfolio and need $50,000/yr from it to live. Then, determine how many years of cushion you’d like in that secure bucket. If you’re answer is 10, then voila! You should have $500,000 in more secure asset classes. This makes sure you have enough dollars in the less volatile assets for drawing income when the stock markets are down. The important thing here is to position yourself not to sell stocks when they are down. That effectively assures a loss!
To answer the original question.
When I’m asked, “should we take some of these proceeds and take them off the table?” My answer is inevitably, “no!” We are positioned to withstand any down turn, typically. Plus, why play the guessing game? If you asked around, no one would have been able to predict a 20% year in the markets last year. Those that tried to outsmart the system invariably missed out.
I’ll leave you with one of my favorite quotes from one of the world’s greatest investors of all time Mr. Peter Lynch. “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”