How to Survive Market Crisis and Reduce Stress
Wealth managers (and retirement income managers) like myself typically recommend those in retirement have at least a portion of their retirement assets invested in things like stocks, bonds and real estate. The wealth strategies employed by traditional advisors have experienced unwanted losses and created a lot of sleepless nights for retirees.
Everyone wants to invest in the stock market when it’s going up. The key to successful stock market investing isn’t how well you do during the good times, but how you handle the bad times. Read on to learn ways you can reduce your market stress without jumping ship.
The returns associated with investing in the stock market the last decade have been spectacular! The Dow Jones Industrial Average surged 72% between February 2003 and May 2007. It powered ahead 22% in the ten months ending in May ’07. That’s when things changed and I saw markets decline over 30% in the second half of 2008.
Many investors lost 50% or more of their investable assets (because they placed too much trust in the wealth strategies employed by wealth managers that were all doing the same thing!).
Even with the terrific recovery in 2009, the declines I’ve see in the first half of 2010 have only increased investor’s anxiety. Many have fled the markets, never to return. Others are trying their best to hang in there. And some are taking actions to help them successfully navigate the ups and downs without losing sleep each night.
Your actions during the ‘panic’ times in the stock market will determine your overall success. Thus it’s vital that your wealth manager/investment manager take that into account when designing the portfolio.
It is said that professional investors don’t react emotionally to market events. Don’t believe it. Those that say that are probably lying! As humans, we all have emotional reactions to events that occur around us. What separates the ‘wise’ wealth manager from the ‘foolish’ one is how they deal with that stress.
That doesn’t mean the ‘wise’ wealth manager sits by and hopes that things get better. Personally, I don’t believe ‘hope’ is a reliable wealth strategy! Individual investors need to prepare ahead of time for the tumultuous times that are sure to happen. Here are some simple steps you can take to reduce retirement investing stress.
Step 1: Determine the amount of money you are willing to lose.
While none of us want to lose money, you can’t participate in the gains if you aren’t able to stomach the periods of decline. If you invest in the stock, bond, real estate, futures or forex markets you ARE going to suffer losses at some point.
I’ve found that there is often a big difference between the amount a retiree rationally thinks they are willing to lose when they set up an account and how they react emotionally when a loss occurs. This number should be based on your emotional tolerance, not your rational tolerance.
I believe it’s also important to convert this number to a percentage. Imagine how you would feel if you lost $70,000! Yet, if you have $2 million invested, that is a decline of only 3.5%, something very likely to occur. If you focus just on the dollar amount you are going to greatly increase your stress.
It’s vital that you know beforehand what your limits are. That way you have a plan and can view losses in light of that plan.
If your ‘stopping point’ is 5%, don’t wait until you lose 5% to start taking action. You need to leave yourself room (mentally and emotionally) so you can then pick up bargains when everyone else is fleeing. Start reducing your exposure early.
When I manage retirement accounts, that’s the approach I take. If I begin to see the markets trending down, I typically will begin taking action (isn’t that what you’d expect a wealth manager to do?). I may sell off some of the weaker performers or those that have a tendency to move more than the market. These are referred to as high-beta stocks because they go up more than the market in the good times but can also go down more than the market in the bad times.
The further the market’s decline, the more I want to reduce my client’s exposure. It’s impossible to avoid all the losses and participate in all the gains. That’s not what I’m trying to do. I’m trying to minimize the downside so that I can be there when things begin to turn around.
When trends begin to change, I then move money back in—sometimes gradually, sometimes more aggressively.
Unlike many wealth managers, I view cash as an investment and feel that there are times when it’s better to invest in cash instead of stocks. Sometimes you play defense, others you play offense. (Contrast that with the sit-back-and-do-nothing approach of many investment managers and you’ll see why my approach is so refreshing.)
Step 2: Determine your overall approach to managing risk.
The common approach among wealth managers is to spread your money between bonds, real estate and equities (both foreign and domestic). The thought is that since these normally move in opposite directions that they will balance each other. This is referred to as Asset Allocation. It’s true to a point, but there are times when it seems like everything goes down. Sophisticated wealth managers realize there are times that diversification can harm a portfolio.
Another approach says that you need to hang on during the bad times because over the long-term stocks should be higher. This is referred to as Buy and Hold. There is some truth in this as well, but it doesn’t seem logical to do nothing to prevent large losses from occurring in the first place. Unfortunately, the wealth management industry is full of investment managers that follow this approach for ALL the investments they manage.
A third approach says you should actively manage your account. This is normally done by using various algorithms or indicators to determine when to buy and when to sell. If the market starts going down your money gets moved to cash. But this doesn’t always work and may result in missing some big gains. Using this approach requires a wealth manager to also specialize in being an investment manager.
None of these approaches are perfect. That’s why, as both a wealth manager and an investment manager, we don’t rely on any one of them. Instead, I utilize all of them together! I use short-term, medium-term and long-term strategies in the same account. If the market starts going down, the short-term typically gets moved to cash pretty quickly. That often reduces the risk enough that the medium and long-term positions can be held on to through the storm.
Step 3: Trust your plan. The temptation is to throw caution to the wind. Don’t.
These are just a few of the steps I use in my clients’ accounts. Taking them won’t guarantee smooth sailing, but chances are they will help you survive the storm intact.
Would you like a sophisticated wealth/investment manager to review your portfolio and help you understand the risks it’s exposed to? Just send me an email at Jeff@CommonSenseAdvisors.com.
Read about my Common Sense Approach To Retirement Investing.