Are you doing the right thing with your money as the markets crash?

Are you doing the right thing with your money as the markets crash?  Do not panic but do not be complacent either.

The music has stopped. After over a decade of up and up, the markets are in a downward spiral dragging all of us down with it.  The virus is spreading so quickly it’s hard to keep up!  What started as some distant thing in China is now at our doorstep and it’s scaring the heck out of everyone. Whether you think the fears are justified or overblown, people are selling. And we are all suffering.

The biggest fear I have is the long-term after-effect of the virus. Even if the spread stops and people stop getting sick, how long will it take for the economy to recover? How much damage will the economy and the businesses have sustained by then? And how will the markets respond?

Should you be worried?  As an investment professional, my job is to calm my clients’ nerves and tell them everything will be OK. But will you believe me if I just dismiss your fears and tell you to “Stay the course”, “Keep invested”, “There is nothing to be worried about”?  Even if you understand rationally that this downturn will be over, it is little consolation when you are facing an upcoming college tuition bill or seeing your retirement account dwindle as you are about to stop working.  So what do I recommend?

Look at your cash needs in the next 1-3 years

How much cash do you need in the next 1-3 years that you cannot cover from income sources other than your investment portfolio? This will depend on your age, stage of life, your working status and your bills.  

For someone in their 20s and 30s who has a small but growing retirement account and no immediate cash needs, there is nothing to be done.  Just brace yourself for a wild ride and learn from it.  Because it won’t be the last market crash in your life. One caveat here is if you are saving for say a house down payment in the next 5 years, in which case you should have that money invested very conservatively in the first place and not take any chances.

If you are in your 40s and 50s and have a tuition bill to cover from a 529 account, it’s a different story. If you don’t have the next couple of bills in a cash instrument or can’t cover it from your income or a loan, you need a plan to take that cash out of the account and meet your obligations.  This may be a good time to revisit your allocation and make sure it is done right.

The pre- and retirees are the most vulnerable as always since they mostly don’t have the income to replace the dwindling balances. Here, proper planning and careful allocation ahead of time is the way to weather the storm.  Take a careful look at your budget, expenses, sources of income and ready availability of cash in the next 3 years. This analysis will tell you how much cash you need and the best way to cover it from your portfolio.  Chances are, you have enough bond instruments that pay sufficient income. If not, it may be time for a serious conversation with a retirement planner!  

Reallocate your portfolio to cover short-term needs

Is your portfolio fully invested in securities such as stocks or bonds?  Do you own enough liquid cash securities such as a plain old savings account or a money-market account? Depending on the answer, it may be prudent to raise that cash and put in a safe place to spend for your short-term needs. Once you do the analysis above, you will have a much better idea of a prudent action plan.

In general, these are the 3 things I do for my clients:

1. Raise cash for the next 3 years
2. Invest the money they will need in the following 5-10 years in a conservative portfolio
3. Put the rest of their money in a more aggressive portfolio to earn a higher return over time

Then of course you have to do this every year to make sure you stay ahead of the game.

If you do not need your money in the next 5 years and have the resources – buy more.

I mean it, this is the time to invest!  The stocks are on sale and there are some good bargains out there.  Just like with any sale, know the value of what you are buying and take advantage of this opportunity.  You will not regret it.

What I tell all my clients is that the size of your investment portfolio and your gains or losses matter less than whether you can meet your financial obligations.  Money does not exist independent of our lives and its primary role is to enable you to live your life the way you want to live it.  As long as you have planned for this situation ahead of time, you can be confident that you will be OK.

Lastly, here are some facts compiled by First Ascent Asset Management (email me for the full report) that I want to leave you with to put this downturn in perspective:

• Research cited by Wim Antoon found that for the period December 1927 through December 2015, the average gain during the first three months after a market downturn was 21.4%.
• Since 1926 there have been 11 Bear markets and 12 Bull markets. The average Bear market lasted 1.3 years. The average Bull market lasted 6.6 years. Average losses from Bear markets were a cumulative -38%. Average gains from Bull markets were a cumulative 339%.
• According to a J.P. Morgan study, six of the 10 best days (in the history of the stock market) occurred within two weeks of the 10 worst days.
  

If you have any questions about this information our would like to discuss your personal situation, do not hesitate to reach out!