Got Volatility?


5 Things You Should Be Considering Right Now

If you have been reading my blog over the last few years, you know that I am a huge proponent of people using strategies that build their confidence and peace of mind.

If the last couple of months, and especially the last few weeks have made you uncomfortable, then I suggest you take advantage of the recent rebound in stock prices from the recent large drops in the market and adjust your strategy to one that is less stressful on yourself.

I know that the increase in volatility over the last few months have might have gotten your attention. You may have heard about the inversion of the yield curve or our trade war with a variety of countries (not just China).

The tone of the market and optimism about stocks over the next few years has waned as a result.

If you look around the world, there are many countries that are close to entering a recession, if they are not there already. This is not an environment for big gains in stocks. Given that backdrop, it is hard to tell how long our market can hold at current levels.


Is There Any Good News?

Since we are one of the only developed countries with positive interest rates on government bonds, people from all over are investing their money here, which has been helping to hold up the value of stocks and real estate, as well as keeping interest rates low for now.

However, the positive effect this is having right now may only be temporary. If more money comes here, it could drive our rates down further.

Both Donald Trump and Alan Greenspan have indicated that they would like to see rates go down to zero or below, like the countries I mentioned above. If that were to happen, it could have a very negative impact on our economy.

This is Not the Place to Stop Reading This Article

Many of you reading this probably don’t find economics and finance to be fascinating subjects like I do, which is why I have broken it down to 5 things you need to consider.

  1. Reduce your risk exposure. There is a time for risk and a time for taking risk off the table. Given current valuations in many more aggressive asset classes (think stocks near all time highs, home prices in many markets, junk bonds, etc.) there is very little upside left in these markets – which means the risk of loss is greater than the opportunity for gain – given the recent slow down in economic growth and 7 straight quarters of declining profits for publicly traded companies.

Pro tip: Meet with your financial advisor and ask them how they are looking towards protecting your portfolio from significant losses.

  1. Raise cash. In turbulent times, cash is king. There likely will be great buying opportunities available if values collapse. People who had access to cash in 2009 were able to make great profits buying stocks and real estate for a fraction of what they were worth a few years before, and they have enjoyed significant gains as a result.

Pro tip: These opportunities have presented themselves after each recession over the past several decades.

  1. Decide how much you are willing to lose. Nobody likes to lose money, but all too often I hear from folks, “I guess I just have to wait until it comes back before I sell”. If something is down 10% studies show it is likely to go down further. Is it better to take a 10% loss or a 40% loss (not really a trick question). Besides, harvesting losses now, will make it easier to sell and take profits once a correction gains momentum. Many people hesitate to sell appreciated stock or other assets because they don’t want to pay taxes. Well if you lose 30% of an asset’s value, that is one heck of a tax!!

Pro tip: Those losses can be used later to offset taxes on your gains. You get to bank them indefinitely to use against future gains.

  1. Consider what your plans for the future are. I have several clients who are looking to sell their home and use some of the equity to support their lifestyle in retirement. Many are considering moving to lower cost areas. Current valuations in residential real estate are very high, especially here in the Bay Area. Right now they are supported by low interest rates on mortgages.

If rates go up or the economy slows this could have a significant negative impact on home valuations. Think back to the last several big stock market corrections (2000-2002 and 2007-2009) and the corresponding reduction in housing prices. There is something called the “wealth effect” that correlates between these two asset classes. When one sneezes, the other tends to catch a cold.

Pro tip: If you are going to spend an asset in the next 5-10 years (like paying for college, starting a business, buying a home, or retiring) you can’t afford to lose money because you don’t have time to wait for the value to recover.

  1. Meet with your advisers. Ask them what they are planning to protect your investments. If you are in stocks and bonds (particularly bond funds) find out how they want to approach this change in the economic climate. Many advisers have forgotten how to deal with market losses (others have never experienced them) since it has been over 10 years since we had a significant economic slow down or market correction. If you are nearing retirement, ask them how they will be creating income from your portfolio.

Pro tip: Make sure they have a plan that meets your needs. The plan should be understandable by you and make sense.


Plan Now So You Are Prepared For What’s Next

Remember, it is your money and your future on the line. Nobody can care as much as you. Things are changing, and the evidence is showing that the challenges are mounting.

Those who are prepared can not only survive a downturn but thrive as a result. Take advantage of current conditions to put yourself in the best possible position for what is coming.

We’re the pros that can help you use these tips to position you to weather upcoming challenges. Make your free consultation appointment today by calling (415) 331-9030 . We’re located on 4th Street, downtown San Rafael.