Fasten Your Seat Belt: Turbulence Ahead

Financial pundits have been warning of the next market crash (being defined as a broad market decline of 20%+) since… shortly after the last one nearly 10 years ago. Even as with a stopped watch, eventually those calls for doom will become a reality, and all those talking heads will say ‘I told you so’ even if they told you so at DOW 9,000 (which was up nearly 50% from the March 2009 low of around 6,400), told you again at DOW 12,000, 15,000, 20,000, 22,000… With the DOW recently hitting a high of around 27,000, a 20% decline would put it around 21,500, still materially higher than the point at which many forecasters said to bail out. As the great investor Peter Lynch stated, far more money has been lost by investors waiting for (fearing) corrections than has been lost in the corrections themselves.

That said, as we have written regularly, it is one thing to be prepared for a market correction as part of prudent near-term financial management and a long-term investment strategy. It is another thing entirely to believe you will be the one person in history who consistently times markets, and makes financial decisions based on this false hope combined with an acute fear that disaster is just around the corner. Hope and fear do not an investment strategy make. But allocating assets according to investment time horizons – shorter-term instruments for cash needed in the next few years, and longer-term investment for funds not needed for several years or more –can be a winning strategy.

The Long Journey

Taking a step back, think of your financial path as a long plane trip. The destination (let’s use retirement in 5–10 years as an example) is out there somewhere in the distance/future, you have enough money to take care of your day-to-day needs (you have food supplies, etc. to get through the plane trip), you just want to make sure you get to paradise intact.

For nearly the last decade it has been largely a smooth ride. Nice big tail wind in the form of generally downward/historically low interest rates (which helps both bonds and stocks), a strong economy, global growth, etc. A little turbulence from time to time where the pilot asks you to put on your seat belt, but nothing too concerning. In fact, a quite unusually smooth flight (i.e. the volatility index, or VIX, has been well below average for many years). That retirement destination is looking good.

Then the captain comes on the microphone and declares, although weather can be fickle, it appears that the tail wind has turned into a head wind (a.k.a. rising interest rates), and there are some storms on the horizon, so expect a bumpy ride.

Here’s what you don’t do: grab a parachute and jump out of the plane half way across the ocean.

Bailing out of a plane – or a plan (financial in nature) when you are only partially to your destination is a very unwise course of action in almost every case. The reason why pilots don’t panic is that they have been through dozens of storms before and they have confidence in their abilities and the plane they are flying. For them, it is just another day at the office.

If you are working with a seasoned, rational, disciplined Investment Advisor, he or she will have the same attitude. In fact, you may receive advice that you may be better off once you reach your destination if part of your portfolio is in dividend paying stocks that will reinvest dividends for more shares and potentially higher future income.

As we’ve espoused time again, financial skies can go from clear and sunny for as far as the eye can see, to severe storms (and back) very quickly. The storms are all but impossible to detect in advance, but they do pass, which is why you need to be very disciplined going into them and especially in their midst. Always keep enough cash on hand to satisfy your near-term needs, and for those funds that are intended for your longer-term destination, don’t shove them out the plane door in the middle of the ride only to lose them to a storm that will surely pass before you actually need them.

As always we are here to discuss your particular circumstances in regards to if your portfolio is appropriately allocated, if hedging could be of benefit to you, or any other financial/investment matter of interest.

Enjoy the ride!

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