Retirement Guys: What to do when the stock market crashesWritten by Nolan Baker Mark Clair | | email@example.com
In our April 27 column, we talked about two steps to take in good markets. The first step we recommended was to rebalance portfolios in all markets and the second step was to avoid chasing performance. Since that time, the U.S. stock markets have suffered around a 10 percent drop in price. The media and the news outlets have quickly turned their attention back to Greece causing a possible global armageddon. After such a quick drop, many investors are wondering if we are heading back into a recession and what they should do. Today we are going to give our readers two more tips on what to do now.
The first thing investors need to do is stay disciplined. One of the best things I, Nolan, got from serving in the U.S. Marine Corps is discipline. In listening to most of the financial media outlets, it can be easy to fall into a trap of making a financial move at the wrong time. Gene Fama Jr., an economist, once said “Your money is like soap: The more you touch it, the less you have.” And we would agree. Again, it is important for investors to rebalance their portfolios but making major changes in a portfolio on a short-term basis can be a costly mistake. Instead of thinking short-term is the next month or three months, an investor should look at short-term changes as the next two or three years. Remember to focus more on the long term.
Mark Twain said “History doesn’t repeat itself, but it rhymes.” That saying holds true when looking at our economy and the stock market. According to BTN Research, bull markets, which are periods of times when the stock market is generally going up, have lasted, on average, for 58 months since 1950. The S&P 500 index started the current bull market back in March of 2009, about 40 months ago.
If history holds true, we could still have several more months of good times. The summer months can be periods of time when the stock market doesn’t do as well as other months. We saw this happen last year and the year before when the stock market went down in the summer, only to rally at the end of the year. Election years, as we pointed out in our previous column, have also historically been good years in the stock market for the remaining months of the year.
Let’s say that this time it’s different and the global problems we see on the nightly news do push our U.S. economy back into a recession. That also isn’t cause to call for armageddon. Recessions are a normal part of our economic cycle. During the economic expansion companies and consumers borrow and spend too much. Then, as the cycle changes, everyone decides to borrow and spend less.
The recession then occurs when the borrowing and spending goes too low. If an investor is prepared with a plan, a recession can turn into an opportunity. Remember, the cycle repeats itself.
The other step an investor should be taking after the recent sell-off is to look for current opportunities and cherry pick stocks, bonds and investments from good quality companies. The younger an investor is the better the long-term opportunity is in more growth-focused strategies. As an investor gets closer to or into retirement, the more the focus can turn towards cash flow strategies. If you are a retiree, we would recommend that you add up the yield of your current accounts and become educated about ways to increase yield.
Let’s say an investor has a current yield of 1 percent. By making some small changes, if the yield is increased to 3 percent that investor can immediately see an increase in cash flow making the day to day noise of Wall Street less relevant.
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An index is a composite of securities that provides a performance benchmark. Returns are presented for illustrative purposes only and are not intended to project the performance of any specific investment. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly.
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