Every day when you turn on the TV or click on the financial page, there is a half second of trepidation while you look to see if the numbers are red or green.
We all remember the last crash and none of us want to go through that again.
There are so many factors that are out of our control when it comes to investing like the economy, war, terrorists etc. that it seems like every day could be the beginning of the next crash.
You’re not alone. Study after study confirms that running out of money is the #1 fear faced by most retirees.
In a post “great recession” world it’s no wonder most people are fearful their money will not last.
That’s why it’s important to ask yourself this question:
Are you confident you can survive the next market crash, or is it keeping you up at night?
If it’s on your mind, then it’s time to show you the 2 key ways to combat it.
Surviving a Market Crash Starts Before it Happens
I’m going to go over a few things you need to know and show you a time tested method of protecting yourself BEFORE your portfolio is ruined and your lifestyle is affected.
Let’s start with something that not too many people think about when designing their portfolios, but it is the single biggest reason I have seen people take a beating in the stock market and never recover.
Emotion
You must have a portfolio that you can live with. Not just in the good times, but also in the bad times. Think about it like a marriage, if you bail on your portfolio when things get tough, it’s going to cost you a lot of money. You need to make a commitment to your investments to stick with them while times are bad. Just like in marriage, this can be a challenge, but there are things you can do to make it easier.
When I talk about a portfolio with a client, I don’t focus on returns. The returns will come, I focus on RISK. You need to know the potential volatility of your portfolio at all times. If you don’t, you could be in for a shock that you simply can’t live with.
Ask yourself what you would do if your portfolio of $1,000,000 that you are counting on to keep you fed and housed in retirement turned into less than $450,000 over a year and a half?
The S+P 500 did even worse than that from October of 2007 until March of 2009, and those are the so called “safest stocks!”
Would you have the heart to say, “I’m not worried, it will come back!” Or would you be one of the many who understandably got frightened and bailed out at some of the lowest prices they possibly could have?
If you can’t stomach the downturn, you’ll most likely sell, and you won’t be invested to experience the recovery. Which is exactly what the market did after that.
If instead, your portfolio of $1,000,000 turned into $800,000 over the same period of time, while the broader market was down almost 60%, you would be a lot less panicky and much more likely to stay invested.
Keeping your portfolio in line with your emotional risk tolerance is absolutely key to successful investing.
If you are being kept up at night worrying about what might happen, then you might need to relook at your strategies or put a new plan in place.
The way to do this is something we have all heard about time and time again.
Diversification – (the real kind)
However, I find that many people and even investment professionals either don’t truly understand diversification or just don’t bother.
Let me be absolutely clear here. A portfolio of all stocks is NOT DIVERSIFIED.
Not enough.
I don’t know how many times people about to retire have shown me their retirement account at work or their brokerage account and all I see is stocks. We just went through an example where a broad based stock portfolio of 500 stocks, lost over half its value in a very short period of time!
Even having 500 stocks in your portfolio is not enough!
In order to have true diversification, you must focus on asset allocation. This has the single biggest impact on risk, as well as return in your portfolio. Most people I see, diversify only among the “blue chips” and leave the other stuff alone.
This is a mistake!
Investing in medium sized, international, and even small sized companies will lower your volatility and therefore your risk! In addition, you need to have other asset classes, such as fixed income and even real estate and commodities are good investments at the right time.
When we design a portfolio, it typically checks all those boxes I mentioned, with large, small, medium, international stocks, bonds etc. We usually end up with thousands of different underlying holdings to give us true diversification. This one simple trick will make all the difference the next time the market crashes.
In summary, if you aren’t able to handle the market downturn emotionally with your current asset mix, it can derail all your plans before you even get started.
And second, when you diversify using the right asset allocation strategy that’s been stress tested to handle a market downturn, that’s what can give you the confidence that you will survive and thrive in retirement.
It is up to you to educate yourself thoroughly and make sure you know what you’re facing before it happens and put a plan in place that you can live with and be confident in.
Do you truly know how much risk you’re currently taking?
Do you know what would happen in another market crash?
Do you know what to do?
You should.
it’s time to focus on answering these questions, to help you do that we have two options.
Check out our free planning process to see if it might help you get the answers you deserve.
Or check out our free case study HERE to see several other mistakes that can cost you thousands if not more in retirement, and make sure you aren’t letting these simple mistakes eat away at your future security.
