Are You Prepared for the Upcoming Market Drop?

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So what was your answer? Are you ready? Wall Street has conditioned a huge segment of the investing public to think, “I am a long term investor, I will just ride out the correction, the market always comes back”. In today’s post, I would like to cut through some of the myths and misinformation that are widely accepted as true, but can create huge losses with little to no warning.
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Are You Missing the Important Market Days?

Brokerage firms, mutual fund companies and other stock oriented financial institutions have lots of nice marketing pieces that show you how much return you would have missed had you not been in the market for the best 10, 20, or 30 days over the last 30 years or some other time frame. Usually your long term return is reduced by 30-60%! While this is mathematically accurate, it only tells part of the story. According to Index Fund Advisors, in an effort to support the “always stay invested” case, show you the cost of missing the 20 days with the biggest gains for the S&P 500. In the last 20 years, missing those days would have reduced your return to an annualized return of 2.05%, a reduction of nearly 87%. A buy and hold investor, for the same 20 years, would have earned an annualized return of 8.19%, so of course, buy and hold makes sense. They then go on and show you that if you missed the 20 WORST days during that period, your return would be increased by 312.22%, with an annualized return of 17.9%! They go on to say that since you don’t know when those best and worst days might be, the only thing that makes sense is to stay invested!

I would submit that, based on the information above, it is far more important to miss the worst periods in the market, than to participate in the best days. I believe the math included proves that! Another report, going back to 1927, shows that missing both the best 10 days and the worst 10 days would still increase a buy and hold investor’s returns by 471% over the 97 year period covered by that study. Again proof that missing the losing days is way more important than participating in the best days! There are other studies, covering different time periods, but the outcome is always the same; it is far more important not to lose money than to earn it!

Why should I care about this now?

There is an oft forgotten truth on Wall Street; every day the market goes up, brings us closer to a day the market goes down, and every day the market goes down, brings us closer to the day the market will go up! Well, we have been going up, without a “normal” correction for almost 7 years. In addition, the S&P 500 has been pretty flat since last July, when it hit it’s all time high. This could signal that the market has run out of steam to the upside and it is only a matter of time until a significant correction occurs. Generally speaking, market history tells us that the longer we go without a correction (drop), the more severe the drop will be. History is telling us that the chances of a significant drop in stock values are pretty high right now. I wrote about this just over a year ago, and people who did something about it avoided some very choppy waters and the stress that went through the markets last winter. I can’t tell you when this will happen, just that every day it doesn’t brings us closer to the event. If it ends up like last time, then you can expect 3-5 years before we get back to the high set last July.

How to Avoid the Market Drop

Here are 5 steps you should take to avoid the downside:

1. Review your portfolio. Sell off losing positions in taxable accounts to offset gains.
2. Look at your positions that have large gains and see how the company is doing. Some widely held big name stocks have been seeing their profits level off or go down in the last year or so, you may want to sell some of them before their pricing adjusts to their falling earnings. After all, nobody ever lost money taking a profit!
3. Meet with your advisor. If you have an investment advisor, sit down with them and ask what plan they have for your portfolio if this happens. If they start to tell you to “just hang in there” and start to go on about the best 10 days in the market, consider getting a new investment advisor, they probably haven’t worked during a significant market correction, so they just don’t know what to do.
4. Determine if you have any significant expenses coming up and move that money into cash. This will buy you time so that you won’t be forced to sell when those expenses occur. This is especially true for those entering soon or already retired. You may want to raise enough cash to pay for the next 2-4 years of income needs. This will help extend the life of your retirement portfolio.
5. Consider moving money into alternatives that won’t be impacted by a market drop. There are lots and lots of great alternatives available, some even have guarantees!

Start Preparing Now. Don’t Wait.

At the end of the day, the more prepared you are for these events, the less likely you are to be ruined by them. I had a client (I was not their investment person at the time) who told me how the market “screwed him” in 2000-2002 as he was about to retire. He had doubled his money once, twice and only needed a third double and he was going to retire. Instead he lost 60%, was behind where he had been before the first double, and is still working today (15 years later).

If you are not sure where to start, or how to protect your portfolio, contact us and allow me to help you identify which strategies will be best in your particular situation, in light of your objectives.
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