February 28, 2020

Remember that time when meeting with your financial advisor and they started talking about a target asset allocation?  Trying to determine what percentage of your portfolio is in high return stocks and how much is in  low return bonds.  You fill out a questionnaire trying to determine what your investment objective is, how much knowledge you have about investments, and what you do when an investment loses money.    The advisor throws out terms like 60/40 or 80/20.  Most clients just say “Yes, whatever your think.”   Every advisor knows that it is not a fair question to ask a client during a calm rational period.  Everyone is going to love stocks when they are going up.  The time to ask the question is during this past week with big moves down each day.  Then the pendulum would swing and the boring safe investments would be where clients would want to put all of their money.  But, would you be happy with a 5% return last year in 2019 when the stock market was up over 20%.  Probably not.  Now is a little payback for that great return of last year.

Let’s put this downturn into a little perspective.

Is the system broke?  In 2008, the answer was close with banks getting bailed out and mortgage loans defaulting.  This coronavirus is a shock to the economy and we really don’t know how much of one or how long.  The market is putting this uncertainty into perspective.  I am sorry that we will just have to wait and see.  Staring at the market won’t help this process.

Did I really need the money that  I have lost in my account soon?  I hope the answer is No.  We do not put client’s money into the stock market that a client will need in less than 3-5 years.  A down payment for a house goes into the savings account.  A retirement account goes into the market.  The percentage depends back to the asset allocation decision we talked about.  If you are under 30 then 100% in the market.  If you are over 60, then 50%-70% goes in the market and the rest stays in those boring bond investments.   If money is needed now from that retirement account, it can come from the bond allocation.  Or, if it has to come from the stocks we still have some healthy gains if the purchase has been made in the last 10 years.

When will this market go back up?  Financial advisors always point to a long term chart and says the market always goes up.  However, look a little closer there and notice it is not a straight line.  There are some wiggles along the way when the market went down for a time.  We are in a wiggle down right now.  The up part will happen, but no one knows when.  That is the point of keeping your stock allocation in the market.  You do not know when the upturn will happen and if you try to time it you will be wrong.

Now let’s go back to that asset allocation discussion we had.  Remember what we said we were going to do with your portfolio.  When the market is good we were going to sell winning stocks and buy bonds to keep us at the asset allocation at its target (60/40, 70,30 80/20, etc….)  However, we said when times were bad we were going to sell boring bonds and buy stocks.   That time maybe coming very soon. 

Losing money is no fun especially when it is being sensationalized on every TV network and web page.  It can make people lose confidence.  Think of this time though as an opportunity.  We have basically had a bull market in stocks since 2009.  A few quick hiccups along with the way, but it has been relatively smooth.  Now everyone is hearing the Bear roar, but the Bulls know that is becoming a buying opportunity.