As I write this article, we are seeing increased volatility in the stock markets around the world. In the US, the S+P 500 index is now flat for 2015 after the losses of yesterday. There continues to be real concerns about many issues in the economic and geopolitical landscape. When will the Fed raise rates and how will they go about it? Will Greece default on its debt (and does it even matter)? How will the continued threat of terrorism by groups like ISIS impact us here and in other countries around the world? As someone once said, “May we live in interesting times”….which certainly seems true today. But is it really any different than the many issues we have faced in our country and the world in the past?
You have undoubtedly heard from us (many times) that nobody has a crystal ball regarding the short term direction of the markets. Having said that, we are pretty sure markets can't go up forever and a correction is inevitable. And in a way, we actually welcome corrections. How could we say something like this? Because market corrections are part of a natural cycle. Without them, valuations would get too high and the risk return ratios of various investments would get out of whack.
It has now been over six years since our last real correction in the U.S. stock market. The low point in the downturn of 2008/2009 was March 9, 2009. Most of you remember it well and the sense of fear and concern it may have brought you. It was truly a trying time and we spent a lot of time talking to clients about what was going on and generally helping them stick to their overall game plan. In hindsight, that advice made sense, as it has in past corrections.
So what should someone do with this knowledge? First, ditch the crystal ball and don't try to time the markets. It doesn't work and you can't predict when or how long a correction will last! We believe that sticking to your asset allocation targets and rebalancing on a regular basis (and also perhaps when these opportunities are present) is critical to long term success. If your portfolio has gotten out of balance in relation to your long term asset allocation targets because of the long run up in U.S. equities, now is a great time to rebalance. We have seen differences in the returns of various asset classes so far in 2015 and it is likely that will continue.
Secondly, if you are relying on your portfolio to meet your cash flow needs, or a portion of them, you should probably have 1-3 years of cash flow needs in liquid or very short term investments so that you do not have to draw down the equity portion of your portfolio in a down market. Now is a good time to shore up those cash reserves.
Finally, and perhaps most importantly, make sure your portfolio allocation reflects your risk tolerance and required rate of return. We have seen many clients lately whose equity exposure is higher than they really can tolerate as a result of the strong recent returns. The time to ask yourself these questions is now, not when we are in a down cycle and you are looking at losses in your portfolio in the short term. We would be glad to help you think through these questions in light of your own personal situation, if we have not already done so in the past.
The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.
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