Since the beginning of October, we have experienced a steep decline in market indexes. After almost 8 years of steady growth, this feels like quite a shock to most investors. Should it?
The economy and the markets move in cycles. These cycles span many years. To deny this is to ignore the natural order of our economic system.
Many believe that the markets reflect the economy. When the market is up the economy must be good. When the markets go down, the economy must be faltering. Not true in the least.
Markets reflect the impact of millions of decisions made by millions of investors, based on how they feel about the future. Short term market moves are often driven more by emotion than by facts. While the economy remains strong, the markets have been faltering.
What we are seeing is the intersection of optimism versus reality.
Corporations, especially large tech companies that dominate the Dow and S&P, have been growing at 30%,to 40% plus for several years. Their stock prices have reflected this optimistic view that these growth rates could go on forever.
Reality is, as companies grow it becomes much harder to sustain such growth rates.
Facebook grew between 30% and 50% for the last 5 years. Analyst project just under a 22% growth rate for the next 5 years. Is Facebook going out of business. No. But optimism and reality have collided and investors need to reset their expectations.
This combined with the fact that the market indexes are dominated by tech companies results in these dramatic swings in the market. But what about the economy.
We are expecting about a 3% growth rate for next year. Unemployment is at all time lows. Wages are rising faster than at anytime over the last decade.
While it is true that interest rates are rising and trade relations are in flux, these things tend to resolve themselves given enough time and attention.
Our view is: in the near term we are concerned that uncertainty and reality will hold markets prices down and increase volatility Once we get through this reset, we should begin to realize reasonable rates of return.
I know about now you are saying to yourself, that’s great Mark but what about me?
Here is a checklist to make sure you are prepared for the coming months of high volatility.
- Do you have a plan that hopes for the best but plans for the worst. All our retirement plans and investment strategies take into consideration several pull backs/recessions during retirement. At the same time, a retiree can’t ignore other factors like inflation, taxes, healthcare costs to name a few. Which requires us to have some of our assets in the market to realize long term growth while keeping a fair amount safe on the sidelines for times like these.
- Is your income plan recession proof? Are you certain that even with a 10% or 20% pullback you will still be able to maintain your lifestyle without having to worry about running out of money.
- Are you positioned to take advantage of times like these.? The only way to make money is to buy low and sell high. Not the other way around.
- Are you allowing your emotions to drive your investment decisions? Should you be selling out and buying bonds or putting more into the market when stocks go on sale? Depends on your situation, financial need and tolerance for risk. Just don’t follow the heard (crowd). Make decisions based on your needs, goals and financial requirements.
During these times of market uncertainty, our team is looking at all of our clients’ financial plans to make sure we stay on track. We are also evaluating all of our investment strategies. How are the portfolios responding to the current market and economic realities?
Is it time for panic? Never. Is it time to take a close look at how our plans are performing. Of course.
If you don’t have a plan that is a combination of hoping for the best but planning for the worst. If you have a plan that doesn’t consider how to generate income during times like these.
Feel free to give us a call and let us do a complete review of your current financial situation and create a plan that will allow you to enjoy your retirement in good markets and bad.