There’s nothing I enjoy more than a (fair) challenging question from a client.
Steve read this article http://awealthofcommonsense.com/2017/04/preparing-for-the-next-bear-market/
and then asked, “In light of this do you think we are over-exposed to equities at the moment?”
The answer is no, but it reminded me that it’s really important we’re all ready for what will happen sooner or later.
If we’re not then you could get a nasty surprise. And if you’re in shock you’re all the more likely to do something daft / dangerous / costly.
Let’s go through it via a FAQ:
What’s going to happen?
At some point the money you have invested will go down in value. And it could stay down for an extended period of time.
In our view, these temporary declines are much more acceptable compared to the permanent loss that inflation will inflict.
Depending on the amount of the drop, it’s either a “correction” or a “bear market”.
We don’t know when this will happen, how bad it will be or how long it will last.
Don’t you have some inkling?
If the past is anything to go by (and it’s all we have to go by) then this is what to expect EVERY year:
• The chance of any decline over the next 12 months is about 25%.
• There’s about a 13% chance it’ll be 10%; And a 6% chance it’ll be 20%.
• 75% of the time, values fall then recover in full during the same 12-month period.
• The other 25% of the time they recover not long after.
So why not just sell our investments and buy again?
In an ideal world that’s exactly what we would do. However, that would require us to be right twice every time we go in and out. We won’t be, no-one is; not consistently.
Just think about it.
To get this spot on and to really benefit we’ll need to agree to sell investments when they are still going up and buy them again as they are still falling.
How contrary is that? What are the chances of us agreeing both times, every time?
So, by far the best thing to do is sit on your hands.
Ok, but there must be something we can do?
You’ve already done it.
In your financial plan there is enough cash and known income to cover your expected expenses for the next three years. And some extra cash as an emergency fund.
That means, REGARDLESS of what your investments are doing, you can carry on living as you expected to.
That allows your investments to do what they need to do, which is beat inflation over the years.
That’s important because we want you to be wealthier tomorrow, not poorer. Sticking with your investment strategy will achieve this.
Three years has been chosen because that’s generally the amount of time it takes for a 20%+ decline to recover.
Is there any good news?
Sure there is – however deep or shallow the correction is, it will be temporary. And when it is over the permanent uptrend will reassert itself. And that will prove enough to keep your money growing more than inflation.
In the meantime you’ve enough to carry on living the way you want.
This level of uncertainty is not a risk (if you stick to your plan) when you have a 30+ year investment horizon.
We’re here for you. Should you have any concerns please get in touch.