Riding Out Financial Turmoil by Focusing on the Long Term Financial Plan
As if we haven't already been on a wild ride over the last two weeks, the Saudi’s added to the uncertainty over the weekend by effectively declared economic war on the American oil industry by cutting the price of oil and promising to raise protection at a time when global oil demand is cratering. That is sending more shock waves through markets including high yield bonds, bank loans, and the overall stock market. Good news? Gas and heating oil prices should plummet and low interest rates will drive mortgage rates to historic lows.
Again, market swings will be exacerbated by programmed trading, forced sales due to margin calls, and a host of other technical factors that long term investors really shouldn’t spend too much time thinking about. In market history this kind of action is going to look at lot like other market debacles such as 1987, 1998, 2000, and 2008.
In all those previous cases, those who fared the best were those who focused on their financial plan, made adjustments if / when needed, and patiently waited for sanity to return to markets.
As for the impact of market drawdowns on financial plans, the key factor isn’t how far markets fall, but how long it takes markets to recover. For instance, what do you think would happen to your financial plan if the market were to fall by 99% overnight, but recover all its value before the beginning of the next business day. Would you even notice? Would it impact your retirement at all? Of course that is an extreme example, but it does illustrate an important point.
As for a more realistic example, we could consider the very recent 20% downturn in the fall of 2018. It turned into a non-event for investors, including retirees, because the market very quickly bounced back and recovered all of the lost value and then some.
Now, this situation is not going to resolve itself over the course of a couple of months, the way the 2018 event did. We are likely looking at market volatility and economic fallout over the next 6 months to a year. But even 2008 as severe a shock as it was, played itself out over just 18 months (from beginning to end of the market downturn anyway…). Those who suffered the most lasting financial hardship were those who were not patient enough to wait for the events to play themselves out, and liquidated into the chaos of late 2008. Those who followed good investment discipline and stayed the course came out largely unscathed.
I admit it is tough to listen to all the bad news about markets and not be a little worried. But it also helps to remember that even as you hear that stocks are down by some big number – chances are you are not invested all in stocks, so any loss to your portfolio will be far less than the numbers you hear on the cable news channel.
So as we face more dramatic market action and discouraging financial headlines today, my counsel to clients is that this is a time to be patient and keep a laser focus on their financial plan. Headlines can be scary, for sure – but this will come to an end in time, and patience in finance is a virtue that is well rewarded.
If you feel the need a check in on investments and the impact on your financial plan, please don’t hesitate to reach out and schedule an in person or online meeting to take a look at your portfolio and plan. You can either call us, or schedule online at www.calendly.com/financialpathways.
Patience and calm!
Jim