How Would You Feel if Your Investments Lost 40%?

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You May Get to Find Out Sooner Than You Think

Summer is here and you are probably spending more time thinking about barbecues and vacations than retirement and paying for your kids college. Because of that, I understand if you don’t read this, but avoiding the signs on the wall could be harmful to your wealth.

I have written before that if the market can ruin your financial plans, you may need to rethink your strategies. Unfortunately, the stock market’s gyrations now have an effect on everything from food prices to real estate values, so we all need to pay attention and make sure our planning insulates us from as much of the fallout and damage caused by a big drop in stock prices, when that occurs.

I remember sitting down with a client back in 2002 to review a couple of small accounts he had with me. Most of his money was with his broker. He said, “Boy, Roger, the market really screwed me. I was on track to retire in 2002 if only my portfolio kept doing what it had been doing the last couple of years”. He went on to explain he had doubled his money in 1997-2000, each year. “I only needed one more double and I was there”. Instead, he is still working. At least he is enjoying his work more than he did back then.

This is not an isolated story and one that was repeated in 2008. Many lost even more than 40%. So why am I writing this now? Well, there is an old line from a song “When life looks like easy street, there is danger at your door”, and right now, the stock market is looking like easy street. They seem to be minting money on Wall Street right now and the headlines are screaming BUY! We are setting records and folks are becoming more afraid of missing out, than of losing money. This is usually a set up for a bigger correction.

Here are the facts; we have gone over 33 months without a 10% correction. The average is once every 12 months. The volume is going down on the New York Stock exchange and the NASDAQ. The number of stocks reaching new highs each day is shrinking. Advisory services are more bullish than they have ever been. Over the last 5+ years the market is up over 133% but the economy has grown a fraction of that. According to Robert Schiller, the price to earnings ratio is as high as it was just before the peak in 2008. This is just a partial list, you can call me if you want more.

It appears the biggest reason people are putting money into stocks these days, is that the Fed is keeping rates so low that there aren’t many alternatives to stocks. This can be one of the worst reasons to buy stocks; that the bank isn’t paying much interest. After all, the Fed has been hinting at raising rates, so what will happen when they do?

I am not saying that the market will “crash” tomorrow. It might drop next month or next year, I don’t exactly know when. What I am saying is that history has a tendency to repeat. If you are heavily exposed to stock based investments for your important goals like retirement and paying for college, then you probably can’t afford to ride the market down (not that anyone can afford to). I would encourage you to take the time to adjust what you are doing to protect yourself. Just switching to bonds may work for a time, but if rates rise, that could prove to be a poor choice as bonds will lose money when that occurs (especially bond funds).

Take a little time this summer to sit down with your advisers and review your situation. When the correction finally occurs, there will be winners as well as losers. A bit of planning and strategizing now, can determine which side you will be on when it does happen. If you have an account you are concerned with, you can contact us to discuss ways to strategically protect yourself.

Enjoy vacation, and take some time to make sure you enjoy the rest of the year as well.
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