Calm Before the Storm?
One beautiful morning last October I was driving into work and my gas light went on. As I passed a gas station I figured I would just get to work early and grab gas later. Well around 3 PM that day, then Governor Nikki Haley held a press conference saying Hurricane Matthew was headed our way and everyone should fill up their tank. As I drove home a few hours later I was not amused. The lines at the pump stretched seemingly forever and clogged up traffic in every direction. I had to run by the vet to pick up a prescription and pick up little Henry from day care. I most certainly didn’t have the time to sit in line for an hour to get gas, much less the traffic already on the roads. It was as if our lovely seaside paradise went bonkers for gasoline…and I had none.
And just as the time to prepare for a hurricane is before it forms, the time to prepare for a storm in the markets is during relative calm. This month marks the 8th anniversary of the current bull market in stocks. Yes there have been a few ups and downs, but overall it’s been a relatively steady ride as far as stocks go. As I write the S&P 500 has not even had a 1% drop in over 100 days. Let’s not let current conditions lull us into a false sense of security. As Forrest Gump once said, “it happens.” And we don’t have to look too far back to find the proverbial “it.”
Now, this is not a call to time markets or do anything drastic. We are not in the business of predicting the future (I feel sorry for those that are). We should continue to invest and take on risks. And I hope we have a 9th and 10th anniversary. It’s simply a reminder to get back to the fundamentals and reaffirm the personal finance faiths that we hold true. Here are a few steps we can take to protect ourselves from what may come our way. The first is one you can take, and the others we take care of for you.
Top off the emergency fund: Just as gas is king during a hurricane, cash is king during financial turbulence. The general rule is 3 to 6 months of expenses. However, the amount largely depends on how variable your income is. If your income is more variable, you will want more and vice versa. Retirees may want even more. This can also include high-quality short-term bonds, home equity lines and life insurance cash value.
Double Check your Risk Level: Make sure the risks in your portfolio are appropriate. Higher percentages of stocks equal higher risk.
Rebalance Portfolios: The rise in stocks over the past few years will cause the portfolio to become riskier if not rebalanced.
Use High Quality Bonds: Lower-quality (Junk) bonds and preferred stocks have been popular because of their higher yields. However, in a turbulent market they will act more like stocks and offer little downside protection. Higher quality bonds will also give us dry powder should a buying opportunity arise.
Consider laddering your risk level: If you have more than one account, think about their potential time horizons. They are usually different. You will want to take less risk in accounts that have shorter potential time horizons than others.
Diversify, Diversify, Diversify: Diversifying across companies and types of assets will protect you. Stay away from large positions in individual companies. Markets will recover. Companies may recover.
Although we should be doing these things under any circumstances, we think it’s a good time to remind everyone that the good times typically don’t roll forever. Now is a good time to stop and top off the tank. If you would like to discuss with us any questions or concerns about your portfolio, we are all ears.
Myles B. Brandt, M.S., CFP®