Spooky Territory for investors

Spooky Territory for Investors

As we approach Halloween the stock market is in spooky territory, as the Nasdaq and S&P are close to giving back all their gains in 2018 and crossing over to negative YTD returns. I believe that markets tend to panic first and think later, but it is possible that the October sell off could be the end of the Bull market that has been steaming along since March 2009. As you think about that date it was over nine years, so should anyone be surprised we will have a Bear market?

Many investors are wondering what to do now? The first thing to consider is a quote I read by Warren Buffett, “if investors are not able to accept a 40% decline then they should not be in the stock market.”

The key of what to do now is more about financial planning than manager selection or asset allocation. A financial plan considers your assets, cash flow; income coming in and expenses going out, and the financial goals for your assets. If you are planning for retirement, college education expenses, or the purchase of a new home, and you will need cash for that in the next 5-year period, then that money should not be invested in risk assets that can significantly decline. The reason is simple. Markets can be volatile and have periods of declines that can be unnerving. But the antidote for these declines is time. If an investor has money in equities and we have a bear market, or crash, then as long as they do not need the money, they can let the boom and bust market rollercoaster continue on its ride, and they can get off in the future when they need the money.

An approach we take at M3 is to create a financial plan that breaks your cash flow and goals into 5-year periods. We forecast cash flow and consider what is the amount of net outflow from investments that will be needed for each 5-year period. We can then consider what the investment composition that balances risk and return should look like for destination portfolios for each period targeted outflow. It is reasonable to think that you will take less risk for assets you need to spend in five years, and you will have the time to recover from market declines for investments you need to monetize in 15 or 20 years.

There are many factors that will determine if October is the start of a Bear market or a wave of volatility. The economy appears to be growing, but we don’t know what the Fed will do with future interest rates, and in one week there is an election that could shift the balance of power in DC that could have a major impact on tax and fiscal policy, and international trade. The key is that this is normal, all factors combine over time to impact our economy and the performance of companies doing business. Time is the investor’s greatest asset, if the stock market drops 40% do you have time to recover? If your investments are in line with your financial plan, you can at least feel confident that your plan is consistent with your long-term goals.

If the market volatility causes concern, then the first step is to evaluate your financial plan and review if your investment portfolio is aligned with your needs and risk tolerance. To take the first step click here for your personal financial web site.

Now go relax, watch the Red Sox march towards a WS Championship and not worry about what they are saying on CNBC.