Are We Heading Toward the Bursting of a Bubble?
As usual, we’re being asked what our crystal ball says about the market hitting new highs and the chances of a fast crash. Will inflation crash the market? Will the stimulus package create a huge bubble that bursts? Will a dramatic change in unemployment blow up the market? What about an increase in interest rates? These and many, many more questions are being asked as people are overwhelmed with lots of conflicting information.
We’re going to pretend to be Socrates and admit that we don’t know what will happen next.
But if you don’t know, how can you not be paralyzed when trying to make a decision on what to do next? You prepare for all scenarios.
We think a lot of people (including advisors) invest far more conservatively as they get older than they should. There is still an old adage out there that people can subtract their age from 100 and that’s how much they can have invested in stocks. That seems completely arbitrary to us, as people live a long time in retirement, have different streams of income, and some have more than enough in investable assets for a comfortable retirement, where many more do not. Rules of thumb are not good enough when you are worried about the market.
You can ask yourself some good questions to determine how much you can put into the market.
First, how is your income? Are you married and do you both have regular income? Do you have a pension and social security coming in? The more income sources you have, the more diversified they are and the greater percentage of your spending they cover, the more you can put into the market and not worry about short-term volatility.
Second, what do you your expenses look like? Are you living paycheck to paycheck, or are you consistently spending less than you make? If you generally live well below your means, it is much easier to take on volatility risk with your excess cash flow.
How much of an emergency fund do you keep in non-volatile assets like a savings account or money market account? If you have a year or two of living expenses built up in assets that are not volatile, that gives you a buffer if your income dries up, you have unexpected expenses, or if the market falls and you can’t take your normal distribution from investments for living. This is something to think about within your IRA, too- if you are over age 72 and required to take distributions from your IRA. If you don’t have some cash to cover that RMD within your IRA, you may be forced to sell in a down market year to distribute that money.
What risk management tools do you have in place? If you are working and relying on your income, are you insured for disability insurance? How about if you die- do you have life insurance that would take care of your family, or would they have to liquidate significant investable assets? How are you going to provide for Long Term Care expenses? People who have these risks covered don’t have to worry about short-term volatility as much as those who do not.
When do you need the money? This is straight forward for a younger person in their prime working years, but more confusing for those already retired. A retiree may say, “I need the money now- I am taking distributions.” But do you need it all? Can you segment what you need in the short-term outside of the market and leave the rest alone? You need to think about this.
Finally, are you monitoring this with a professional team (more than one person helps to avoid mistakes and group think)? Are you buying high-quality investments with lower fees, or are you using a knee jerk strategy based on headlines and what your golfing buddy said? You need to make sure you have a logical system that is tailored specifically to YOUR needs. Even our little blog may be helpful for things to think about and consider, but it should not be taken as gospel as it’s written with broad strokes of information.
Assume you know nothing about the future, and then plan for every scenario you possibly can.