VOL. 131 | NO. 221 | Friday, November 4, 2016
Rays of Wisdom
Dana and Ray Brandon
Prepping for the Next Market Correction
BY RAY AND DANA BRANDON
Ray’s Take Stock market corrections are an inevitable part of investing. Since 1932, declines of 10 to 20 percent have occurred every two years on average. It might happen next week, three months from now, or next year.
Don’t kid yourself, or let your adviser deceive you, that you can time yourself out of it. Asset allocation will determine most of your ultimate terminal wealth, and if well-designed, it will help you make good choices and avoid emotional bad choices. But it will not give you a crystal-ball insight into the randomness of market corrections.
There are some choices you can make that will help.
Keep a cash cushion. Cash is king in a volatile market. Savvy investors with cash can take advantage of opportunities that arise when other investors are nervous. Cash is especially important to retirees because it means you don’t have to sell stocks at the bottom just to pay bills.
It’s also important to diversify your investments through disciplined asset allocation. No one can know for sure which sectors of the equity markets or the fixed income markets will be up or down on a given day, week, month or year. But if you are diversified, you will be in a better position to weather any changes. Over time, you will learn your risk tolerance. You may think you know your tolerance, or believe you will respond rationally, but until you’ve lived through it, you don’t know for certain. Your real enemies are fear and greed, and they are formidable foes.
Keep debt low or non-existent. It is much more stressful having to “feed the beast” when those monthly statements come in worse and worse. Your mind will play cruel tricks on you and you start to question things you might not question in less stressful times. You can count on hearing scary market predictions on the news. Non-emotional and educated details are what should drive your planning. Ask your financial planner to help you understand the risks associated with your investments, so you know what to expect in every market condition.
Dana’s Take The stock market, much like life, is a roller coaster. You know there are going to be some scary moments. The truth is, no matter how long you’ve been investing in the stock market, a sharp downturn can still turn your stomach around. That’s usually followed by a slow climb back up to where you feel comfortable.
Being prepared as much as possible can make some of the changes a little easier to take. Once you’ve done that, try not to focus on the detail. Zoom out and look at the big picture. Those changes that seemed so scary at the time will seem much smaller in that mode.
Try to keep the perspective that in general the market goes up over time and it has periods of corrections when it goes down, sometimes dramatically. A sound plan requires time, commitment and focus. The stock market is not a “get-rich-quick” strategy. Patience can pay big dividends.
Ray Brandon, CEO of Brandon Financial Planning, and his wife, Dana, a licensed clinical social worker, can be reached at brandonplanning.com.