How to prepare for market corrections and advances

Tuesday, November 28, 2017|Managing Investment Risk|
  • How To Prepare For Market Corrections And Advances

Situation:

Most investors are not prepared for market corrections and advances.

My View:

Finding personal motivation to plan your wealth is the starting point.

Solution:

Mull over your action plan for implementation as markets rise or fall.

“Motivation is what gets you started. Habit is what keeps you going.” —Jim Ryun, Olympic runner

We’re working our way through the fourth quarter 2017. Many stock indices have been hovering near their tops and often keep making new highs. Daily headlines are typically a mixed bag of fears and optimism. They are often interpreted as indications of possible changes in market direction.

Some themes really stand out. For example, NAFTA talks are topics du jour in the US, Mexico and Canada. The United Kingdom is wrestling with Brexit implications. German politics are entertaining altering the seating arrangements.

Many stock indices hover near their tops and keep making new highs.

China faces pressures from increasing debt levels. US tax cut battles keep marching along. Several faces will soon change at the US Federal Reserve. Rising interest rate discussions send chills down the spines of borrowers. These few points alone are forceful enough to create trepidation in investor minds. You will have no difficulty finding headlines for every investment neighbourhood.

As a result, investors develop itchy fingers that want to migrate to the safety of the sidelines, whether it’s beneficial or not. Of course, these investors that have the need for action will make the crucial timing calls on what to buy or sell. Everyone should know by now that timing the markets is a low percentage approach, fraught with many dangers.

My Observation
This brings me to one important observation. Wise investors are in the habit of investigating what it takes to be well prepared for both market corrections and advances. They have at least sketched out a rough game plan for each case on the back of the napkin. Something to get started, aiming for the right path. I encourage you to become conversant with what you would likely do with stocks and bonds during bullish and bearish markets.

Most investors that think in this fashion prefer to have some framework of how to approach the uncertainties that come their way. Just some simple ideas are required to get started. The best news is that today’s planning is being conducted while stock prices are high.

Finding the motivation to be informed is a welcome initial step. Perhaps, discussions with your investment professional will shine more light on what actions are in your best interests. Reconfirming your family risk profile is also time well spent. Hopefully, these efforts lead to more disciplined planning for the precious nest egg. The main mission is to reach and deliver your retirement objectives.

Seasoned investors are well aware that diversification and rebalancing strategies are part and parcel of this logical planning approach. I cannot emphasize that enough as nobody knows where the markets are headed or when a directional turn comes around the curve. Bells do not ring when the time is ripe to make portfolio changes. Neither at the top, nor at the bottom.

My Recommendation
I suggest mulling over these situations in preparation for your exercise:

  • How will you react to each case becoming the new investing normal?
  • Do you prefer to sell your stocks to stop the financial pain when markets stumble?
  • Can you stomach classic “buy and hold” approach when stock prices are low?
  • What will you do when stock prices continue to keep falling?
  • How will you get back on board the markets after each case?
  • Have you thought about the approach to the bonds you own?

Be absolutely clear as to which is more important to you: return of capital versus return on capital. They will require different portfolio structures depending on your choice. Your answer is the prudent starting guide for your game plan.

Too many investors have the need to act too quickly, too often. My timeless recommendation is not to make any large bets with your long-term portfolio. Mind the risks, take ample time. Many before you have lived to regret those sudden, knee-jerk moves that were far from necessary.

Instead, turn your motivation into a lifetime habit. That delivers benefits you can rely upon.

I welcome your questions, feedback and comments.

About Adrian Mastracci, Discretionary Portfolio Manager, B.E.E., MBA  My expertise in the investment and financial advisory profession began in 1972. I graduated with the Bachelor of Electrical Engineering from General Motors Institute in 1971. I then attended the University of British Columbia, graduating with the MBA in 1972. I have attained the “Discretionary Portfolio Manager” professional designation. I am committed to offering clients the highest standard of personal service by providing prompt, courteous and professional attention. My advice is objective, unbiased and without conflicts of interest. I’m part of a team that delivers comprehensive services and best value in managing client wealth.

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