May 2017 Hurricane Season Revisited…9 Steps to Prepare for an investment storm
Our periodic communication that reminds you to ask, “Should I react to those headlines?”
“A stock market decline is as routine as a January blizzard in Colorado. If you're prepared, it can't hurt you. A decline is a great opportunity to pick up the bargains left behind by investors who are fleeing the storm in panic.” Peter Lynch
“You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets.” Peter Lynch
What about the National debt? What about ISIS? What is President Trump going to do?
No one actually knows what the eventual effect of the three headline events above will be on your investments. The uncertainty is the reason investment decisions involve risk of loss.Yet, as you will see, we recommend being wary of taking action based on emotionally charged headlines. That recommendation is based off years of watching investors take actions based on headlines, which they later regret. While reading financial headlines, we believe being mindful that you are unique is important. Each person’s circumstances are unique and a broad headline or article cannot possibly cover every person’s circumstances.
With hurricane season around the corner we thought it might be useful to consider how preparation for a hurricane and preparation for an uncertain market re action may be similar. We will attempt to turn a situation in which we have no control, into a series of questions that may help us take better action. Questions such as: Am I ready for the hurricane or event? What if it does not happen? Should I rely on my ability to predict the strength, location, and timing of the storm, be it investment or hurricane related?
From our experience preparing for a hurricane during a hurricane is not very useful, i.e., it’s too late. When looking back at the history of hurricanes we find various outcomes. Sometimes the storm dissipates before hitting land. In such a case, one may experience feelings of aggravation at having prepared for it. This may be similar to a feeling “wasting” money on insurance premiums in the event that no claims arise. Sometimes the storm is small in which case, here in Louisiana, we have what is known as a “hurricane party.” Sometimes the hurricane unexpectedly changes directions and then it becomes “someone else’s problem”. And, as we all know, sometimes they can be devastating, life altering events. In conclusion, we believe that to live as though there will never be another storm would be imprudent.
When preparing for an “investment storm” we recommend you consider the following nine pieces of advice:
- Maintain a low withdrawal rate. In terms of risk related to running out of money, the lower the withdrawal rate, the better. Other risks such as longevity and poor health are also reason to keep your withdrawals to a minimum.
- Maintain an appropriate allocation towards high quality fixed maturity investments. Consider years of expected withdrawals as a starting point in these discussions. For our clients, potential financial storms are the reasoning behind our questions to you regarding allocation and the amount of future known withdrawals. (Fixed maturity investments involve risk also—see point five)
- Maintain low debt levels. High debt levels can inhibit financial flexibility, or the ability to adjust to unforeseen circumstances.
- Maintain work skills and work contacts. Some of our clients have reported that work allowed them to realize they have more control over their finances than previously thought. During the financial storms it can feel as though you have no control and are subject only to outside influences.
- Do not maintain an allocation to one single asset or asset class. At worst, this could unexpectedly wipe you out, given other-than-perfect conditions. Even without wiping you out, it may inhibit the financial flexibility you do have in making adjustments. George Hebert remarked, “The mouse that hath but one hole is quickly taken.”
- Practice an investment philosophy which involves patience and risk consideration before potential returns.
- Practice an investment philosophy which is focused on valuation, instead of the popularity of your investments.
- Do not rely on your or someone else’s ability to predict the near term future events for the overall success of your finances. We have found that inevitably some “guru” will be parading around after the storm claiming to be able to predict all future market events. Some investors then play the game of predict the predictor. We have found that game to be difficult, if not impossible. In other words, we believe it to be highly entertaining, but not profitable.
- Do not allow the basis of your investment decision to be based solely on past price charts. It doesn’t matter whether one’s response from chart gazing is “Hey that’s dropped a lot, therefore I need to buy/sell”, or “Hey that investment is on a run, therefore I need to buy/sell”, the compliance saying springs to our mind, “Past performance is not indicative of future results.”
Please remember, these tips do not imply a guarantee you will get through every storm unharmed. We believe it prudent to warn that this is not a forecast of an investment storm hitting but rather our thoughts on how to improve the odds of financial survival in a world in which we do not know the timing, strength, or location of the next investment storm. All investors share these uncertainties.
Hopefully you now have a better understanding of the meaning behind Peter Lynch’s quotes above and that, if you are prepared, you may just find opportunity in the financial storms. Discovering this type of opportunity may lead one to sing Eddie Rabbit’s “I love a Rainy Night” after the financial hurricane has passed. In order to even be able to consider taking advantages of opportunities from the “investment storms” one must also not find themselves without liquidity.
We appreciate that you have taken the time to read our piece. If you have any questions feel free to email or call us. For those of you along the coast, let this also serve as our reminder to check hurricane supplies and preparation plans!
Talk to you soon.
Please remember to contact Advisor.Investments in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you want to impose, add, to modify any reasonable restrictions to our investment advisory services, or if you wish to direct Advisor.Investments to effect any specific transactions for your account. A copy of our current written disclosure statement discussing our advisory services and fees continues to remain available for your review upon request.
Advisory Services through Advisor.Investments • A doing business as name of Diversified Investment Strategies, LLC, an SEC Registered Investment Advisor • Insurance Services through Advisor.Investments: Main Office and Mailing Address: 11939 Bricksome Avenue, Baton Rouge, LA 70816
Voice: (225) 292-0687 ~ Fax: (225)292-0006 ~ Toll Free: (866) 748-0687
Past performance may not be indicative of future results. The above individual account performance information reflects net of applicable transaction fees and other related account expenses. Account information has been compiled solely by Advisor.Investments, has not been independently verified, and does not reflect the impact of taxes on non-qualified accounts. In preparing this report, Advisor.Investments has relied upon information provided by the account custodian. Please defer to formal tax documents received from the account custodian for cost basis and tax reporting purposes. Please remember to contact Advisor.Investments in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you want to impose, add, to modify any reasonable restrictions to our investment advisory services, or if you wish to direct Advisor.Investments to effect any specific transactions for your account. A copy of our current written disclosure statement discussing our advisory services and fees continues to remain available for your review upon request.