With all the indexes out there, we’re hitting all-time highs. That means market valuations are high, leaving the question — where do we go from here?
As we break records across the board, it’s been interesting to hear some of the comments that are coming out of this situation and seeing people start to ask about the markets.
Some people have been saying, “I want to get out of the market because I’m worried it’s going to go down.” Comments like this make me laugh because while they may not think they’re timing the market, they are. And to me, that’s never a good idea.
Others want to get out of the market because they’ve seen their friends go to cash, or because they want to preserve their gains. Everyone looks at the highs right now and want to be more conservative. Plus, I’m also getting all the political questions from this political environment with this president, and the next election, and with people thinking that the market is going to have a correction.
I especially love when people ask me what I think the market is going to do. When this happens, I tell them, “Well, if I knew that, I wouldn’t be telling you. I would keep it to myself!”
There’s no way to predict what the market will do, even though many like to try. If 100 experts give their opinion on what the market is going to do, and 50 say it’ll go one way while 50 say it will go the other, 50 of those experts are going to be right.
Even with the bond market, they asked 30 so-called economist experts what interest rates were going to do in 2019, and all 30 said they were going to go higher. Well, guess what? Interest rates actually went lower.
These experts are like weathermen, they’re just good at guessing, but they’ll still get stuff wrong.
But guessing isn’t what you hire me and my team at Heller Wealth Management for. You hire us for our firm, for our financial planning, cash flow analysis, asset allocation, diversification, low cost expenses and funds — things that we can control. Not things we can’t control, like the market. I can’t control what the market does.
I can, on the other hand, control how we can minimize taxes. I can use control by making use of low-cost funds, by doing asset allocation, and by making sure you have enough cash reserve for a down market. These are some of the things people hire us for.
When the Market Is Really Down
Why do people care so much about what the market is doing and when it’s going to go up and down? Because they want to make as much money as they can while not losing as much money as they can.
Usually we see people wanting to buy when the market is up because they want to get in on good performance. But that’s not when we want to buy. That’s actually when we usually want to take some profits out. Then, when the market’s down, that’s when we want to buy.
One thing I tell people is that when the market is down, it’s only down on paper. If you have the market down in your accounts, it’s not down until you sell it. Looking back to 2008, everybody who got out of the market after it went down, they actually booked their losses. And if they didn’t get back in right away, then they got hit on both sides and lost on the recovery.
This is something I’m constantly explaining to prospective clients. Luckily, we educate all our clients so no matter what the market’s doing, our phone isn’t ringing off the hook. We teach them so they have a good understanding of what their time horizon is for investing, and the importance of knowing their risk tolerance.
Being Conservative Based on the Market
You shouldn’t be basing your risk tolerance on the current economic or political environment. Your portfolio and your asset allocation should be based on your time horizon, your risk tolerance, when you need to take money out of your investments, and how much return you need to meet your retirement goals.
10 to 15 years ago, investors who wanted to go conservative were able to live off interest. But now, interest rates are so low this isn’t something that’s really possible.
Ask yourself, “When am I going to use the money?” Because if you're using this money to buy a house in the next year, or to fund a wedding, or pay for a college education, that money should not be invested in the market because you're going to need it in the near future. Instead, just be consistent with the plan that you've already put in place.
Re-evaluating Your Comfort
Evaluating your risk tolerance is not a one-time thing. We give our clients a 26-question risk tolerance questionnaire to give us an idea of what they’re comfortable with so we can know what their pain points are. That way, if the market is down, they won’t panic. It also gives us a great indication of how much equity they should have in their portfolio.
We do this every five years because people’s risk tolerance changes. Life happens.
But again, considering our low interest rates, you have to look at it from an asset allocation, long-term investment approach.
Withdrawing From Your Portfolio During Retirement
Withdrawing money from your portfolio during retirement is something that really scares people. No matter how much money you have, once you stop working and you no longer have that spicket going in and there's own money going out, if you have withdrawals from your portfolio, you have a down- market. Now you're seeing two things on paper: the market going down and the money you’re taking out going down, so you can have a big hit on your portfolio.
One of the things we like to do is use a bucket strategy. With this, you have one to three years of expenses in cash so when you're drawing down your portfolio, you don't have to worry about what's happening in the market. The money that you have in the stock market should be long term (a 10-year time horizon) bucket money, and then you can keep maybe three to 10 years in bonds.
According to a study from 1972 to 2018, with high drops, the market has recovered within three years. That means, with this bucket strategy, you get your money back in three years. So, if you have a longer- term time horizon, the long-term bucket money that you have is only going to be down on paper for three or so years.
So, as I tell many people, don't worry about what you hear on TV. Turn the announcer off, or just think, “Hey, Heller Wealth Management told me that's my long-term money.” As long as you believe that over long periods of time, you're going to make more money in the stock market, that's where you should be.
Navigating Stock Market Valuation
So, what do I recommend for navigating the stock market? Know your risk tolerance. Know your time horizon. Know what your withdrawal rates are, how much you have to pull out, and how much you need to keep in cash. You should rebalance your portfolio when certain sectors are up and take your profits and put it into certain sectors when they're down. And you should stay the course.
As your personal situation changes, you should adjust your overall allocation. Use investments that are low cost, like we do. If you do all these, you don't have to worry about what's going on in the market today or tomorrow, and you'll sleep better at night.
Also, if you have a professional helping you out, let them know about your personal situation changes. If you’d like to have professionals like us on your side, we’d love to chat with you.
Feel free to call (631) 293-2806, or you can contact us on our website here at hellerwealthmanagement.com