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Are You Ready to Lose $200k?

With a tough end to 2018 after a poor December, the 2019 stock market looks to finish up significantly from a year ago. There were many prognostications of the end of the bull market and calls for a recession, but 2019 has brought us solid earnings and a more accommodative Federal Reserve from an interest rate policy perspective. Despite a lack of a solid trade deal with China and impeachment proceedings facing Donald Trump, the stock market has shaken it off and marches forward.

As we generally see market timing as futile, we have to spend some time looking at the reality of the stock market situation: this has been an expansion that has been long in duration in terms of years and also in the lack of meaningful volatility. However, we will, at some point, see the start of the next bear market. If you subscribe to mostly a “buy and hold” strategy in your investments, the cold truth is that the average bear market will take a significant bite out of your assets.

If you have $1 million in invested assets in retirement, a 20% portfolio downturn equals a loss of $200k! While the math here is rather rudimentary, we often notice in meetings that clients rarely consider the actual impact of a bear market on their personal net worth. Consider also that the average bear market is a decline of over 30% and a duration of 13 months (with subsequent recovery taking 22 months, on average). The next bear market will require us all to be patient. A loss, after all, is not actually a loss until you hit the sell button.

We don’t know whether the next bear will visit us in 2020, 2021, or even later…but what can we do about it now? We offer three suggestions:

  • Check the chance of your financial plan succeeding when you stress test it at certain levels.

  • Reassess your risk tolerance levels. If the last time you checked your perception of risk was a number of years ago, it’s a good time to look at it again. 

  • Rebalance your portfolio. If it has been over a year since you brought your portfolio back into balance, you might be taking more risk than you think (since equities now are likely a higher percentage of your overall allocation due to gains).

Note: If you are already a client, we are helping you with all three of the above items on a regular basis, though it is also a good idea to check into your risk perception periodically.

Are you prepared for a down market? If you are questioning whether you are, schedule an appointment and we can help you out (our initial consultation has no cost or obligation). It’s always better to prepare for the rain when it’s sunny outside.

Clint Walkner