The intelligent want self-control. Children want candy.
Rumi.
Why do we act surprised when the stock market crashes or a bear market occurs? The stock market does not move in a linear progression upwards. Historically, however, over long periods of time, it has trended upwards. Yet, there is up and down motion along the way. When the market has gone up too far, too fast, for too long, a crash might occur. This should not come as a surprise to anyone.
Now, there are a bunch of things we can do to protect ourselves from market crashes and bear markets. The first thing we can do is not put all our eggs in one basket. We simply should not have all our money in one investment category, period. We should work to create a portfolio that is balanced and diversified.
Diversification is not magic. It is also not a guarantee against loss, be it in a rapidly declining market or under other adverse circumstances. That said, money, for example, deposited in a savings account – preferably an account that is completely FDIC insured – is not going to go down in nominal value because the stock market declined.
Savings accounts, CDs and money markets do not garner much of a return in today’s interest rate environment. That makes them unattractive to some folks. Perhaps, we might consider non-correlated assets, that is to say assets that do not move up and down along with the stock market. You might want to consider speaking with your financial advisor about this.
Anyway, back to surprises that should not come as surprises. When the stock market has gone up for a relatively long period of time, without pulling back or if the price/earnings ratio of the market as a totality is high relative to historical benchmarks, it should not come as a surprise that at some time, it may decline. This decline might be gradual or fast, as in a crash but again, it should not come as a surprise.
Instead of waiting for the market to decline and then scrambling to take action, we might want to think about it ahead of time and plan for it. Diversification, including but not limited to assets that are not correlated with the stock market, as well as assets that are negatively correlated with the stock market – meaning their value tends to go up when the stock market goes down – might make sense. I believe that the best time to think about this and plan for it is not during a moment of crisis. What do you think?
If you believe that it makes sense to plan for market downturns, you might want to consider speaking with your financial advisor about it. We should not leave ourselves in the position of being surprised by something that is unsurprising.
After spending time thinking and planning, take action.
Scott R. McGimpsey April 19th, 2017
This material was prepared by Scott McGimpsey and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources, however, we make no representation as to its completeness or accuracy. Neither Summit Brokerage Services Inc. nor Scott McGimpsey is engaged in rendering legal, accounting, or other professionally services. If such assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any federal, state, or municipal tax penalty. Moreover, a diversified portfolio does not assure a profit or assure protection against loss in a declining market. UNIFIED PLANNING GROUP is an independent firm with securities offered through Summit Brokerage Services Inc., Member FINRA, SIPC