It was the most dismal December in the market for many a decade.
The Dow Jones Industrial Average tumbled more than 650 points on a very Grinch-like Christmas Eve, while the S&P 500 dropped to just short of bear market territory, almost 20 percent below the peak levels set earlier in the year.
The grim financial headlines created a serious case of market anxiety for investors across the country.
Unfortunately, no one can tell us exactly where the market will head over the next few months, and there are several wildcards in the mix.
But we can tell you that, of all the top investment strategists and economists we follow, few if any foresee an imminent recession. Most forecast a still-growing economy that’s positive but slowing in pace.
We’re cautiously positioning portfolios for future uncertainty, but feel the gloom-and-doom has been a little overdone.
If that doesn’t give you peace of mind, here’s something that might. You can’t control the future, but you can most certainly plan for it. We do quite a bit of bear market planning for clients that helps them to understand that they’ll be all right, even if the economy heads south.
Here’s what we mean.
Modeling the bear. Many clients have been in our office recently reviewing their retirement projections with us. They know we stress-test portfolios to measure how well they can weather a bear market scenario. This helps ensure that, even if we’re hit with a bear market, our client’s lifestyle and spending plans won’t be derailed. It gives people enormous peace of mind to see what happens if a bear market strikes, and know their portfolio can bounce back.
Staying on track. Another way we help clients stand up to tough markets is by working with them to monitor their yearly spending. Remember the 4% rule? It’s designed to ensure that your portfolio won’t run out of money, even after decades of annual withdrawals. By taking out about 4% each year (we use a slightly modified strategy), you can maintain your withdrawals through unfavorable or bear markets. The tradeoff is you take out a little less than possible during raging bull markets. It gives clients peace of mind to know that we’ve designed an annual spending strategy that lets them keep withdrawing even though the markets are turbulent.
A little dry powder. We’ve worked with clients through several bear markets and recessions, so we’ve had first-hand experience with what works to keep you safer – and what doesn’t. If you want to play it safe, make sure to have access to cash reserves for unexpected expenses. Keep debt levels low and manageable. Diversify your portfolio, and make sure your investment allocation accurately reflects your level of acceptable risk. Avoid over-concentrations in any one stock, or in illiquid investments like real estate. Oversave and underspend. That way, you can sail through any bear market without getting mauled.