Let’s talk about the stock market. The bull market is currently over 10 years old. Does that make you confident, seeing double-digit returns as a sure thing? Or does it make you worried that maybe we’re close to another market decline like 2007-2008?
The problem is that whether we start talking about the exuberance of the market or the exuberance of investors if we make wholesale portfolio changes based on either viewpoint, we’ve made a market timing decision. The next Great Recession has been predicted ever since the market began climbing again in 2009. Those who acted on those predictions at that time would have missed one of the biggest bull markets in recent history.
There is no shortage of money managers who insist that they can successfully time the markets. Many seem credible and some may even be able to cite specific examples of success they have had in doing so. They may truly believe that they have discovered a valid timing process.
But the line between luck and skill in money management is hard to discern, even for those doing the managing. There are many examples of money managers who were lauded as market geniuses after great runs of performance only to crash and burn. Once you start to play the market timing game, you set yourself up for almost certain failure.
What we need to do is to reframe the question entirely. We shouldn’t ask, is the market heading for a drop soon? We know that stock markets don’t go straight up forever and that there will be a correction at some point in the future, after which the market will rebound again. Instead, we should ask what is it that we control, and should we be making changes in the things that we can control? We can control how much we save and spend. We can control how much risk we take. And we can control our own investor behavior.
Asking someone what’s going to happen to the financial markets is an exercise in fortune-telling. The best thing to do is to forget about trying to consistently accurately predict the direction of the stock market and start to think about risk. Ask yourself if there’s a serious chance that you’re going to panic and sell your positions if the markets, and your portfolio, happen to drop 20% or 30%. If the answer is yes, you’re taking too much investment risk. At some point, we are going to get a stock market correction. The question you should be asking yourself is “What would I do if it fell by 10%? By 25%? By 50%? That’s a risk question. Do you know how much risk you are taking? Do you know what your actual risk tolerance is? Do you know how much risk is really present in your current investment portfolio? If not, give us a call to get your risk number and the risk number your investments are taking. If they match up, then you will have a lot less to worry about the next time the stock market falls. If they don’t, we can make recommendations to get them more in line so that you don’t panic the next time the markets decline.
Arie J. Korving, a CERTIFIED FINANCIAL PLANNER™ professional, has been delivering customized wealth management solutions to his clients for more than three decades. Prior to co-founding Korving & Company, he was First Vice President with UBS Wealth Management and held management positions with General Electric.