It’s a good thing we have mighty brains, because humans are pretty useless in the face of danger. Sometimes doing what you think is the right thing can lead so adverse consequences. For example, survivalist experts and African safari guides often advise travelers never to turn their back and never to run when confronted by a lion. Yet, when faced with one of Africa’s apex land predators, who has the courage to take the advised steps of making direct eye contact–without breaking it–while backing very slowly away. If the lion charges you then you throw your arms out to make yourself look bigger and make as much noise as possible because lions will often do one or two mock charges (running towards you but suddenly stopping a few paces away) before a full-on attack. Most often, this will make them reconsider and run off.
With the recent market sell-off, where we are seeing a lot of down days and not a ton of rallies, I can sense the angst and uneasiness when talking to prospects and clients. There are two things we can be relatively sure about. That the market will keep crashing and that there will be another recession. Bear markets often overlap with recessions but not always. Just like a lion charging toward you and survival is based on your ability to be level-headed plus the courage to confront the danger.
This always boils down to why you are investing. Do no buy a security without having a sell strategy. Do not invest with a money manager unless you can understand and articulate your bear market strategy. For those select few, once you win the game, stop playing. Don’t gamble more than you can afford to lose. Having it and losing it seems to be heavy on the minds of many near-retirees who see record equity prices and who have lived long enough to know that bull markets don’t last forever. They can end very badly. Severe bear markets near a retirement date can delay retirement plans and even permanently lower a standard of living in retirement. The solution is to gradually shift the game away from growth of capital and toward preservation of capital, though not entirely.
For those younger households, who still have careers that let them buy more equities at bargain prices after a correct because they are dollar-cost averaging into their 401k, getting an employer match, and ‘hopefully’ reinvesting the tax savings their portfolios will recover even faster than the market. When dividends are included, the U.S. market recovered from the Great Depression relatively quickly.
Nonetheless, let these recent market moves be a wake-up call and ask yourself the following questions:
• Do I have the emotional capacity to maintain my current strategy? Will I let negative cognitive and behavior bias cause me to make irrational investing decisions?
• For those approaching retirement, do I have at least 5 years of required portfolio income in short-term investment grade fixed income, so I don’t have to sell my equities in a bear market?
• Have I let my asset allocation run too aggressive during the last two years of abnormally low market volatility?
• How did my current portfolio perform during the Great Depression?
• Should I rebalance my performance?
• Are my fixed income (bonds) strategies talking on too much risk?
• What do I have that can be redeployed when assets classes move to distressed levels?