A Guide to Preparing for a Shift in the Economy
In today’s world of lightning speed, computer-driven investment and trade algorithms, our emotions, and whether or not we act on them, are exacerbated by real-time, 24-hour news headlines. If you consider the ease and speed of using exchange-traded funds, to increase or reduce allocations in investment portfolios, you are at a further disadvantage to making the wrong move with the herd. We believe, and the empirical research supports this, that we are the biggest threat to our own financial goals, as our emotions become vested and powerful drivers of decisions. That is, we tend to make decisions based on our fear, greed, and lack of awareness. Furthermore, the research says we inadequately monitor our own investment goals and we fail to adjust our portfolios, so this, too, has a penalty.
Your preparations for a downshift in the economy should be squarely focused on the awareness of these threats and staying current on your investment goals, period left, and sources of a safety cushion. Your safety cushion or knowing the means to supplement your income in unforeseen circumstances or events is highly important. This can make the difference between you exceeding your investment goals. We might have heard that saying, “when it rains it pours,” and “the increased chances of people having to sell at the worst of times is nonetheless true.” The timing effect of an unforeseen event and downtown in the economy can be devasting to long-term returns, as the evidence supports, cutting annual returns in half in a lot of studies. Conversely, if you have the insight, fortitude, and discipline to maintain systematic rebalancing of your investment portfolio to both your strategic and tactical allocations, in the face of market and human emotions, you will reap the benefits of buying low to sell high, instead of selling low to buy high.
In today’s world of low-interest rates, two well-known asset managers recently announced that the general flagship, time tested investment portfolio ratio of 60% stocks / 40% fixed income now has evolved to 70% stocks / 30% fixed income. In some senses, the logic and underpinnings of this call make sense when we apply history in the context of today’s ultra-low interest rates. Most investment professionals have seen Roger Ibbotson’s great stocks, bonds, bills, and inflation chart. When you combine investment history with the long-term floor of 0% in interest rates, tactical adjustments in your overall portfolio allocations will seem prudent. Also, notice how we can no longer say interest rates have a short-term floor of 0% in place of negative interest rates to spur economic demand. We can remember or read about the times when the U.S. government’s 10-year bond yielded 16% in 1982 and the great bond bull market that ensued over three decades when interest rates went lower. If you fast forward ten years or longer, you would be surprised that interest rates went higher from today’s levels. Conversely, future stock returns could be said to be weighed down by low inflation expectations, rock bottom interest rates, and extraordinary global monetary policies over the last ten years being unwound.
In general, we use historical returns of asset classes and sectors of asset classes and adjust them up or down according to today’s market environment. In spite of who will be most right or wrong, history and the benefits of diversification serve as the best guide. Your time period is the single most important contributor to exceeding your investment goals.
Other major contributors of influencing your investment success include being disciplined in your plan, staying up to date on progress and adjusting accordingly, and avoiding the fate of having to sell in the worst of times. It’s often said that lucky people aren’t really lucky-- it’s just when preparation meets opportunity.
Here is a checklist that will serve you well in exceeding your investment goals amid the next downtown whenever that may come:
- Don’t time the market. History says you will be wrong.
- Maintain a 3-6-month liquid, risk-free safety nest or have cash readily available.
- If your investment period is under five years, develop a detailed plan to reduce risk and systematically increase safety to support near term investment goals.
- Explore alternative assets to stocks and bonds, making sure the risk is aligned with your profile, for improved returns, higher-income needs, and buffers for your investment portfolio.
- Plan for opportunities with the capacity to be proactive. In the investment world, we often hear “never let the arrows run out in your quiver” and “keep your powder dry.” It’s a good idea to know both your plans and options for liquidity.
- Investment horizon is the best driver of exceeding your investment goals and it drives strategic allocations.
- Review and monitor your financial situation at least once a year to plan or adjust accordingly.
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