S&P 500 has gained more than 100 percent since it bottomed out back in March 2009.
Economists will continue to debate when the next crash or recession will occur. Some will be right and most will probably be wrong, and trying to figure who to listen to can make the average investor’s head spin.
Eventually a decline will happen; it is a normal part of our economy and has been that way forever. Instead of trying to time it just right, use these four tips to get your portfolio ready before a decline occurs.
1. Don’t always stay fully invested in the markets. In general, risky investments such
as stocks, bonds, mutual funds and variable annuities, are long-term investments. The less the investor needs to rely on these accounts for current income, the more risk the investor could be willing to take.
I, Nolan, remember my professor in college telling me that over time, stocks and bonds go up in value. In theory he was right, yet he didn’t mention that investors need to factor time into that equation. A good rule of thumb is as investors gets older, they should be safer with their money, especially with money they need in the next few years. Realize that no one can predict the markets in the short term.
Sometimes it makes sense to either not take the risk at all or have an exit plan in place prior to markets getting bad. If an investor is taking current income from risky investments or isn’t sure what the exit strategy would be if the markets declined, this would be a good area to review now.
2. Stress test your investment plan. The American Heart Association on www.heart.org says a stress test helps a doctor know the type of exercise that is right for you. The test helps a doctor figure out how well a patient will do when stress occurs. The work this association is doing is saving lives and extremely important. The same principles can be applied by the average investor. Monitor how investments are currently doing. Get an investment EKG, if you will, that shows what percentage of your money is at risk versus principally guaranteed, how much income is flowing in monthly and what the maximum drawdown the portfolio could decline. If an investor hasn’t reviewed these numbers before or it has been a while, now is the time to look at the potential warning signs before an unexpected problem occurs.
3. Remove emotions, use logic. Using logic assumes the average investor will use correct and reliable evidence. The problem is when it comes to investing; logic can go out
the window. We get it — in today’s society the average investor is bombarded with investment decisions, most of which play on their emotions, which is why logic usually gets clouded. Don’t let this happen to you. Try and make decisions based upon facts. If you are considering making changes, does the change logically make sense or is it just to solve a short-term emotional concern? If an investor doesn’t logically understand his or her investment plan, now is the time to talk with a professional and have it explained.
4. Diversify beyond traditional investments. In our opinion, true diversification goes beyond owning a few different investment accounts that go up and down at the same time.
Although traditional investments like stocks, mutual funds, bonds, and variable annuities have done well in the past few years, the same principle applies today as it did years ago; don’t put all of your eggs in one basket. If all the accounts an investor owns go up and down just like the stock market, he or she probably isn’t fully diversified. One tip for an investor right now is to review the correlation of the investment holdings. Try to diversify into several different potentially profitable strategies that have different correlations.
Hopefully, the stock market continues to go up for a long time to come. Yet, our country is at a crossroads and global issues still loom, so we have a long road ahead of us.
Even if a stock market crash doesn’t happen any time soon, taking these four tips and reviewing them with your plan will only make you a better educated investor and put you in a position to be more prepared than you were before.
Securities and Investment Advisory Services are offered through NEXT Financial Group Inc., Member FINRA / SIPC. NEXT Financial Group, Inc. does not provide tax or legal advice. The Retirement Guys are not an affiliate of NEXT Financial Group.
