Are You the Type Who Loses Everything in a Market Crash?
It’s hard to believe that 2008 was a decade ago. In many ways it feels like yesterday. The period was very frightening for most people and it was an exceptionally tense time as our national and global leaders were even trying to figure out what to do. Yet, now that we have “recovered”, we find it interesting that the further we get from the experience, the more the memories of the fear subside. In other words, people don’t think it was as big a deal as it was, and they start behaving like it won’t happen again. But the best time to prepare for a storm is before a storm- not during it. In 2008, these were the types of situations that we saw that hurt people the most- do any of them describe you?
Those who did not save enough cash and/or income to weather the storm had to sell securities at low prices. This forced them to concrete their losses and use up more precious assets than they would have if they had cash in the bank. This is particularly dangerous later in working years or in retirement. Those who had enough cash and/or income to weather the storm, didn’t have to sell low and could just wait it out. They may have even been able to buy low, helping their long-term return.
Those who live beyond their means are almost always in trouble. Folks who are immersed in debt with no way to make payments, people who have locked themselves into a lifestyle that is at or even a little bit above their income, and people who don’t really know the difference between needs and wants all get themselves in trouble. They usually can’t or don’t cut expenses fast enough and end up spending down whatever slim assets they have. When access to debt also froze, many of these people lost their homes. This happens in good times and bad, but in bad times, it’s amplified significantly.
Those who aren’t prepared for an emergency are often the ones who have one. Markets turn, and if they turn like they did in 2008, bringing the economy with it, people lose jobs. Or maybe the emergency is a family illness, disability, or death. Many people are inadequately insured or ill-prepared and can’t handle these situations in good economic periods. In bad ones, they may drop insurance coverage to save money and then find themselves needing the insurance. It’s critical to review your coverage regularly and make sure it’s enough to cover these needs.
Those who have too much invested in concentrated positions may learn a hard lesson. Many people like to invest in their company stock, and then it’s also given out to them as a bonus. It’s easy, over the years, to build up a large percentage of your portfolio in just one company. Or maybe you’ve held on to an inherited stock, or they have stock from a corporate bard you served on at one point. The challenge here is that you pull in business risk from one company. And if something happens to that company, a large part of your net worth can go with it. We recommend that people keep their assets well diversified- after watching Enron, Tyco, and Sprint, we’ve seen this up close, and it’s not pretty and it can be avoided.
Those who have too much in speculative or illiquid alternative investments get burned. High net worth and high-income Investors seem to be particularly vulnerable to these strategies. They start to feel that with their assets levels or income levels so high they should add something “different” or “sexier” to their portfolios. They are also more often targets for people who want to sell those types of investments. The challenge here is that there are no guarantees, most of the investments assume everything will continue to go just fine in the market (or just the opposite with a hedge fund), most have high fees and illiquidity issues. When people have too many of these in their portfolio, the cumulative number of them can cause them pain in a down market that they may not recover from as well. In other words, these non-public assets are not as nimble or liquid as the market as a whole, in our opinion. We think it’s worth it to stay more flexible and limit these options.
Those who want to be as good as their neighbors at investing never are. Your neighbor/co-worker/hairdresser is more brilliant than you. It’s time to accept it. In 20 years, we have heard more times than we can tell you about this brilliant person our client knows who heard of this deal or is employing such and such strategy that is just a great deal. Often times, we hear later that it went bust. This example leads to the old adage, “If your friend jumped off the Brooklyn Bridge, would you?”
Those with no strategy, who are ruled by their gut, get stomach pains. We see this with people who come talk to us for the first time in every down market. Without a clear written strategy to refer to, people panic. They sell and make their losses official. Then they don’t know what to do. We prepare and write it down. And even though we have over 20 years of experience, when things get scary, the first thing we do is go back to the plan we wrote before we got emotional. It works like a charm.
Those with too small of a nest egg, in a concentrated, illiquid position with no cash, just lost their job and were injured in a car accident, with tons of debt & the neighbor who said he’s selling everything. These our favorite people. I’m sure you can understand why.
Here’s the bottom line: we believe in the market. We’ve seen it do wonderful things for people. We believe a sound, diverse, simple, low-cost strategy is a good way to build security. But even more than believing in the market, we believe in core financial planning principles. It’s why we chose the name “The Planned Approach”, instead of “The Market Approach”. The Planned Approach advises that the preparation and planning is done in advance. The Planned Approach advises that the plan is written down and yet still flexible for whatever comes our way. The Planned Approach advises to trust the system because we can’t control the system- only our own behavior. The Planned Approach can advise anything, though, the key is, do you follow the advice?
20% of the population will be over 65 years old in 2040 (only 22 years away). (Time/Journal for Financial Planning)
By Kelly Hokanson, CFP®
Late in 2017, we had the chance to speak with a few college counselors to get their opinion on best strategies/worst mistakes prospective students can make when embarking on the college search. Here is a compilation of the tips we thought were the most valuable.
College is a financial decision, but don’t start there. Come up with criteria- atmosphere, athletics, career choices, first. Then back into financial. Parents should help kids come up with a list of things that are important- they have never gone to school before and may not know how to figure out what is important to them. As we always say, they don’t know what they don’t know.
Adjust as students visit, and when discussions about money start, rank colleges from 1-5 (or however many are on the list). Go to #1 and see if you can make it work. Now you have a strategy. If #1 won’t work, go to #2. Encourage students to take their time, grow up, and figure out what they want.
If money is a factor, but not the main factor, try to minimize it. Don’t rationalize an education because it’s free/cheap. It costs more in the long run if students transfer.
There is money out there for college- institutions do not have all the students they need, due to high school graduation numbers being down.
Delay your decision as long as possible. Apply to a dozen or so schools- once a college accepts you (usually in October), your space is reserved until May. Don’t tell colleges until April. As it gets closer to May, they become more generous with money that is available, because they want/need to fill spots.
You don’t know how much a college costs until you get accepted. It is rarely the price that is “advertised”. Colleges will typically negotiate on cost, especially for good students.
When asked what their number one tip for students was, the counselors overwhelmingly the answer was “meet as many professionals as you can”. Ask questions like ‘What do you do?’, ‘Would I like what you do’, “What skills will I need for that career?’
We frequently meet with the high school kids of our clients to start these preliminary discussions. Sometimes it’s beneficial for kids to hear it from “the experts”, who are so much smarter than mom and dad. As always, we’re here to help if you need us.
“To invest successfully does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding the framework.” ~ Warren Buffett
Market Update: Don’t Freak Out- Keep Perspective
1-31-18 YTD Dow: 5.9%
1-31-18 YTD S&P 500: 5.7%
1-31-18 YTD World EX US All Cap: 4.7%
1-31-18 YTD US Agg Bond: -1.2%
Market update: perspective – go back 18 months & ask if would settle for value of today’s S&P fund?
The fundamental problem with watching short term market performance is the emotions it evokes that are hard for even the most experienced of us to control. Since February started, we have had some crazy, record breaking volatility. The news is, of course, milking it (because the political climate isn’t enough for ratings???). But guess what? There is a cure for this. Look back at your December 31, 2016 statements. Then look at your account value today, or any given day when the market is “down”. That was just one year ago – are you still content with what you have compared to then? But that is still short-term performance, and actually should be ignored. Go back to July 1, 2013 (when we became an RIA, so it’s special to us), and check that statement. Are you still happy? Hey, that’s still short-term performance; ignore it. Go back to December 31, 2008- are you content with that performance from there until now? Now we’re talking long-term- 10 years- you can pay some serious attention to this. Now, if you’ve kept really good records, go back to when you started investing. Wait, we bet you don’t have those records. Instead, try to remember your first investing choice. Maybe you signed up for a 401k, or maybe you were gifted a little stock. Close your eyes and really think about how you were scared and just wanted to start something. Now open your eyes and compare it to what you have now.
Keep perspective. You are investing in companies and loaning money when you invest in stocks and bonds. You have hopefully diversified, kept your fees low, have adequate insurance and an emergency fund. Markets go up and down- it’s how the financial system works. Stay calm and stick to your plan.