It really is not a question of if the markets will drop in the future but when. The more relevant question is how it will affect you. While we cannot control what the markets do we can control how we react to volatility and potentially what impact it has on us. Market drops are a regular part of the longer term investment cycle and we expect always will be. There are those who are not hurt or even benefit from market drops and there are those are negatively impacted. In many cases the choice is largely yours.
Most people who lose assets do so because they panic and sell. This is because they are fearful or because they were not prepared financially or psychologically. Understanding that markets will drop and being prepared is the key to benefiting from this. When things continue to do well, has they have over the last seven years, it is easy to invest in a manner that exposes us to more risk than we might otherwise take because things are doing well. We always recommend a diversified allocation based on both your needs and risk tolerance. This should include six months’ worth of living expense in cash or short fixed income investments so that you can ride out short term market corrections.
We are often asked if we know the markets will drop why we don’t just go to cash and wait. The fact is that it is impossible to time market dips and also when to get back in. Missing just a few of the best days will have a significant impact on your long term performance. For instance if an investor invested $10,000 in the S & P 500 in 1995 through 2014 they would have had an annualized return of 9.85% and their $10,000 would have grown to $65,453. Had they missed just the ten best days their return drops to $32,665 and if they had missed just the fifty best days over those ten years they would have actually lost money with their investment dropping to $6,392 (Source Business Insider 3/12/15 – 10 Best Days.)
What should you do?
- Do not try to time markets
- Monitor your portfolio and rebalance as appropriate
- Have on hand enough cash for short term needs
- Be reasonable in your expectations for both growth and also negative periods
The role of a good financial advisor is not so much selecting investments but helping you develop a plan that meets both your needs and your risk tolerance and then sticking with it – in good times and bad. The right advisor will help you from becoming too aggressive when markets move up or moving away from a good plan when they go down.
Feel free to contact us without cost or obligation to discuss your vision. Even if you are working with an advisor we are happy to provide a second opinion. Our team has more than 150 years of combined experience and is here for you. You can reach us at (440) 974-0808 or feel free to email me at my personal email address firstname.lastname@example.org .