Stock Market Risk: Know How Much You’re Taking, Be Sure to Monitor, Be Willing to Adjust
Financial Pulse Oct. 20, 2018 Seg 1 & 2
With stock market volatility increasing recently, it is imperative to know what you have, how it works, and how it affects you. On October 10, 2018, the DOW dropped the most points in one day since 2008. Those kinds of drops can even make the strongest of investor wills a bit shaken. Key questions to ask yourself:
What is my investment policy statement?
Do I even have one?
What risk am I willing to take compared to the risk I’m actually taking?
Are you watching your investments?
How often do you look at your statements?
Correction: In the audio you’ll hear that I say the DOW had it’s biggest one day drop ever. That was incorrect. It’s the biggest since September 29, 2008.
Segment 1
Segment 1 Transcription:
00:02 Danny Howes: Well, good morning, welcome to the Financial Pulse Radio Show. I’m your host, Danny Howes, CEO of East Coast Tax and Financial Planning. Welcome, welcome, hope everybody’s had a great week so far. It’s been an interesting week and a half, two weeks, with this stock market bouncing around like it has been. It’s kinda had a lot of people asking a lot of questions, particularly, “How’s my account doing?” And “Where do we stand?” And it’s a wakeup call anytime we see these drastic moves. We actually saw the Dow dip as far as points, not percentage, but points in one day, the largest in history, just this week. So we’ve seen lots of things happen and it really begs the question of, Are you in the position, proper position, according to your risk tolerance and what your goals are, particularly if you’re close to retirement or in retirement?
01:03 DH: Fundamentally speaking, our unemployment rate is, literally, historically low right now. The economy is moving along. There’s a couple little hints where wages aren’t necessarily keeping up with some of the growth, but nonetheless, overall, things are going pretty well, as far as fundamentally speaking. Now, if you look at the rest of the globe, it’s not so hot. Here in the US, we’re experiencing record unemployment rate, we’ve experienced record highs in the market and consumer spending, discretionary spending, confidence, people going out and buying things that they don’t necessarily need, but that they want, that is very strong right now, going into the holiday season. But there’s a couple of things that we need to think about when we’re thinking about investing money in the market, particularly if we’re close to retirement or already retired, and that is basically the… What’s going on in the rest of the world, and what’s going on with Fed policy, and then also looking at a big time election, big, midterm election that we have coming just less than a month away.
02:16 DH: So all these things have reason to cause markets to get jittery. Fed came out and raised interest rates and hinted that they were gonna raise them again before the end of the year, and that makes companies really nervous. It makes investors really nervous, because Wall Street, when things are going well, they just don’t want any kind of change. They just want things to continue to go well, they want to know, they wanna have a quantifiable understanding of where they are and where things will be. But when you enter in monetary policy, the Fed coming in, making announcements of changes that could affect markets in a tremendous way, particularly in bond markets and so forth, and the easy flow of capital. When companies can borrow money at cheap rates, it gives them a lot of confidence to be able to go out, raise capital and invest in their company and create growth. So when those things are at risk, especially in a market that’s done so well for so long, then there is sell-off, there is correction, there is nervousness and there are thresholds that are met that cause things to go down even further, meaning big trading firms, institutional firms have mechanisms in place once a stock price or the market gets to a certain place, they sell down even more.
03:31 DH: So just looking at all of those things with the elections coming up in November, there’s a lot of speculation on what that could do. But if you look at where this market is, and the fact that things have been going so well for so long, a lot of times, what ends up happening is the market, in general, looks for reasons to sell, rather than looking for more reasons to buy. They’re always looking for reasons to buy, but the fever becomes more of like, “Okay, is this the day that we’re gonna see these tremendous drops again?” And if we look at November elections, and how important those are, there’s a lot of talk amongst… If Democrats get put in office, how they may go to raising taxes and trying to get rid of a lot of the key aspects to the JOBS Act that was passed at the end of last year. And so obviously, those big tax cuts for the corporations, and even people in general, seeing their paychecks being larger and that, in turn, creating more confidence in discretionary spending. That puts a lot of that stuff at risk. I’m not getting political, it just is what it is, because that’s what they’ve been saying.
04:45 DH: On the other side, if Republicans end up maintaining the House and the Senate, then I suspect that a lot of the markets are just gonna kinda hum along like they have been, because again, they don’t like change. But if we see more interest rate increases and then we maybe see a change of power, and then there’s that uncertainty, it’s not a matter of whether Democrats are right, Republicans are wrong, or vice versa, it’s just a matter of what the market is comfortable with, and the more predictability that the market can see, as far as sustainability of things going well, the better off it’s going to be. But once they think that there’s gonna be something that’s gonna disrupt what’s been going on, then that’s when you start to see a little bit of jitteriness and a possibility of people taking more off the table in profits, and selling off, creating a downturn in the market.
05:41 DH: So that’s all speculative stuff, folks. But at the end of the day, it’s just what we have to keep a really close eye on in looking at, to make sure that we’re positioned properly, going into some of these uncertain times, and some of the things that we’ve just dealt with. And if you look at the rest of the world, the emerging marketplace, international investing is very challenging. When you see currency issues in Brazil and Venezuela and Turkey, and how that’s caused mass inflation, and then you look at what’s happened in China, and some of the other countries because of a lot of the tariff talk and the tariff wars. So there’s a lot of things out there that are risks to the market, and there always is things, but just knowing what those things are and understanding so you can make sure that whatever risk that you’re taking that you’re absolutely comfortable with.
06:38 DH: And when things like this happen, when we’ve seen it. If you haven’t watched the news much and you haven’t really paid attention, the stock market has been selling off quite a bit, we’re not in bear market territory by any stretch in imagination, but there has been a correction. And we saw a couple rebounds here in the last couple sessions. So some of it’s coming back, but nonetheless, that’s when you really wanna have a conversation with yourself, and even your existing financial advisor of, “Okay, how much risk am I actually taking? What’s my downside potential to my portfolio?” So that if I look at that number, and if I’m… Especially if I’m almost retired or in retirement, and I’m really uncomfortable with that downturn, the potential of what my investments are willing to do… What my investments have the potential to do, that’s when I really have to do a gut check and see if I need to make some changes in my portfolio.
07:26 DH: A lot of people say, “We can’t be emotional when these markets do these type of things,” but money is emotional because we work so hard for it. So in that regard, your risk tolerance in a market that’s not doing so hot might change compared to maybe when things have had a prolonged good run. And you might say, “Well, how can you be consistent if you’re gonna switch from back and forth, back and forth?” And I’m not saying that you need to constantly be switching. What I am saying, though, is you need to be constantly asking yourself the question, “What am I most comfortable with in different market environments?” So that when you see a correction, it’s not a panic, it’s a, “Okay, I’m still within my tolerance, within my comfort zone, so I should be okay. I know when things are gonna start to get out of my comfort zone, these are the changes that we’re gonna make.”
08:17 DH: And it goes back to the investment policy statement that I’ve talked about in the past. When we talk about overall financial planning, the investment policy statement is so important. It outlines how much risk you’re willing to take for the reward that you desire, and also ensures that you understand what the absolute worst-case scenario, when we backtest an investment strategy against maybe a 2008 or early 2000s, when we saw major corrections in the economy. And that way, it’ll help you sleep at night knowing that you can make smart financial decisions, making smart risk decisions. There’s nothing wrong, even if you’re listening to this show, and you say, “I don’t wanna take any risk at all, zero risk,” there’s still ways to grow your money in a zero risk environment. You just have to understand that, obviously, with more risk comes the potential for more reward.
09:10 DH: Well, we’re gonna come back, and when we come back to the next segment, we’re gonna talk more about risk, we’re gonna talk about the market, things to watch out for. Just really some strategies to put yourself at a place of choice and control, so that if we see some things throughout the rest of this last quarter, with the elections, with the fact that interest rates are going up, some of these things have been rattling the markets, to avoid some of the pitfalls of what some of these huge downturns can… In sell-offs, could do to your portfolio. I’m Danny Howes with East Coast Tax and Financial Planning. You’re listening to The Financial Pulse, we’re talking about what’s going on in the market right now. We’ll be back right after this segment in just a bit.
Segment 2
Segment 2 Transcriptions:
00:01 Danny Howes: Well, welcome back to the Financial Pulse Radio Show. I’m your host Danny Howes, CEO of East Coast Tax and Financial Planning. Welcome, welcome. You are listening to The Financial Pulse. And I just wanted to talk today about just the elephant in the room. The market has been all over the place over the last week and a half, two weeks. We’ve seen some pretty major drops. In fact, the Dow saw its largest point drop ever recorded just in one day this week. So we’ve seen some sell-off, and that’s caused a lot of nervousness obviously, caused a lot of people to take a double-take. If you haven’t been watching the news, you don’t know about this, you really should.
00:37 DH: If you have a 401k, if you have an IRA, or a brokerage account, or savings accounts that are invested in the stock market, or variable annuities, or variable universal life policies, anything that’s tied to the stock market, if you have money there, you really should be taking a look at that on a regular basis and keep an eye out for the news. It’s not enough just to hire an investment firm and just set it and forget it, or a broker that you trust. You really need to be involved personally, because when you are involved personally and you’re educating yourself as much as you can and just really know the comfortability of where you feel good as far as how you’re invested, that’s gonna help you sleep well at night. It’s also gonna help you make smart financial choices and decisions. But the more you’re outside of it, the more you don’t pay attention, the more that you’re not checking your statements, even on a monthly basis, go ahead, take in a glance, take a look at… Open up a website, bloomberg.com or Morningstar or Yahoo! Finance, and just read some of the financial news of what’s going on in the world so that you don’t wake up one day financially disappointed or even embarrassed.
01:45 DH: And that’s what we’ve seen over the last major crashes, is that people just weren’t paying attention. We’ve become comfortably numb. We forget what it’s like to stub our toe in the middle of the night. And then it starts to happen, and then it’s like, “Oh, wow, what do we do?” And it’s late reaction. It’s a lack of being proactive. Stephen Covey talks about “be proactive.” And you’re probably really proactive at your job or the business that you’re running and own. You may be really proactive at your education. If you’re a professional, a scientist, a doctor, a teacher. Whatever the case may be, you may be very good at your craft, but you gotta remember that your craft and what you’re working so hard for right now, is to build that savings account, build those buckets of money so that your future, that you can maintain the lifestyle that you desire well into your future after you to decide to stop working, or rewiring instead of retiring. Whatever the case may be, so you can make sure you don’t outlive your money.
02:43 DH: And it sounds simple enough, but it’s really easy to just set it and forget it. And when we see a lot of the volatility creep back in, that’s when we really wanna scratch our heads and say, “Okay. Am I in the right place in case some things aren’t necessarily gonna go so right?” And that’s really what I’m talking about. If your portfolio is designed in such a way where you’ve already seen it, you’ve seen what it could have done maybe in a major correction like 2008 or the early 2000s, or in a rising interest rate environment if you have a lot of fixed income in your portfolio. How would your portfolio react with big changes in the market, big swings one direction or another? And it’s that risk-versus-reward question.
03:28 DH: And I rephrase the question a little bit like this to help people think about that, and it’s like this. So let’s say you bring in $100,000, to make numbers simple, to invest in our firm. And we invest your money. We have your $100,000, we make 30% that first year. Now we’re up to $130,000. The question is, do you change what you do? Do you change your mode of operation? Do you change your budget at home? Is it really gonna change your life much if, all of a sudden, we made 30% return? Really great return for you. Most people would say “no.” Most people would say, “I’m happy with that 30% return.” At least, that’s what most people tell me. “I’m happy with a 30% return. That’s more money towards my goals to make sure that I’m more secure.” So in effect, they feel more secure because they made more money. But there’s not really gonna be a major change in habits, or change in how they do things, or how they spend their money. They’re just happy that they’re gonna have more. It doesn’t matter what your number is. If you had a million dollars, 30%, $300,000, whatever it is.
04:46 DH: Now, we flip that conversation around. You work decades for what you’ve accumulated and worked hard. Maybe you’re close to retirement, almost retired. You bring $100,000 in, or you bring a million dollars in, whatever that number is, and we lose 30%. We lose 30%. So now instead of $100,000, we’ve got $70,000. Now, instead of a million dollars, we have $700,000. Then the question is, would that rattle you? Would that change you emotionally? Would you be upset? And then also, would that maybe change your plans? Would you still feel like you had enough money to retire? Would you feel like you had to make up for a lot of lost ground now? Would you feel like you would need to do maybe a lifestyle diet, where you have to trim down expenses? Not go on those particular trips you were dreaming of, maybe not buying that house or the condo on the beach, or whatever it is. Or just, “We’re gonna have to tighten the budget at home because we know we’re not gonna be able to maintain at this current level.”
05:49 DH: That’s the risk-versus-reward question. And as you tighten that up and you look at, say, a 20% reward for maybe a 10% down, potential down or risk, we tighten that number up so that when we design a portfolio, and we invest the money, we are tailoring it around what you feel comfortable with on the potential of the investments, ’cause everybody knows if you invest money in the stock market, there’s a potential that there’s gonna be downturns, there’s gonna be times where it’s gonna be down, and there’s gonna be times where it’s gonna be up, and we try to live by the averages and invest our money so that our average rate of return meets our expectation, without taking on more risk than our expectations can afford.
06:37 DH: And so that’s really the question. That’s the risk-versus-reward question that people should constantly be asking themselves, so that when your advisor, your stock broker, whoever, maybe even yourself, is investing the money, you need to make sure you’re investing within that risk tolerance and that comfortability and that… It all goes back into the investment policy statement of “What am I gonna do? I have a pre-determined action that I put together according to what goes on in the market, or according what goes on in our lives,” and so on and so forth. So that when these things come, we already know. Although we don’t need to react, or yes, this is kinda reaching my threshold of making an action. Whether it’s a buy action, or a sell action, or something like that. Or your advisor is gonna make a reallocation or change things to make it so that they’re meeting your expectations.
07:28 DH: That’s what that investment policy statement is all about, is to help you to get through these types of times so that when there is an event to trigger your reaction, or your advisor’s reaction to change a portfolio potentially, then it’s already there. It’s baked in, you already talked about it, you already thought about it. And that could still change. You could still change your mind on how that works, but having that in the forefront really gives you a good baseline going forward. It’s not like a deer in the headlights of, “What do we do?” White knuckling it all the way down if I see a major crash or that sort of thing. ’cause you just don’t know because you’re paralyzed because you really haven’t prepared yourself for these things. I know these things sound really heavy, it’s like, “Well, that’s what I hire financial advisors to do, or somebody like our firm to do,” right?
08:15 DH: But I’m just talking about getting involved in your money. Regularly speaking to your financial advisor. Regularly speaking to your accountants and regularly speaking to maybe an insurance agent that sold you a growth type of product, like an annuity or a cash-value life insurance policy. It’s amazing to me how many people come in, that are first time people into our firm, prospective clients, maybe they need an analysis done, they want a tax analysis done, or they wanna know what’s going on in their investments. And then we describe how we operate and what we do and how often we meet with our clients, communicate with our clients. And it’s amazing to me how few phone calls, or even visits, and sometimes it goes on for years, where there is no communication between the person that’s managing your money and yourself. Like zero, maybe once a year a phone call.
09:09 DH: And there’s bound to be some things that are surprises that can pop up as a result of that much lack of communication with the professionals that are in charge of your financial life, if you’ve got people that are managing money for you and so forth. If you’ve got a 401k, that doesn’t mean you can’t get professional advice on that 401k. Financial advisors can still advise you on your retirement plans at work and so on and so forth if you have employer retirement plans. So just because you’re separated a little bit more from your money because it’s an employer-sponsored plan, like a 401k or 453 or 457 or 403b, those type of plans still should be monitored and looked at on a regular basis, so that you can be confident in where you’re going.
09:57 DH: Well, just like every week, we are running out of time, but every single Thursday, right here on WAXE radio, 10:30 AM, every single Thursday, East Coast Tax and Financial Planning, this was the Financial Pulse and I am Danny Howes. Make sure you visit our website, eastcoasttaxandfinancial.com. Make you protect that money, folks, but make sure you know who and what you’re protecting it from. We’ll talk to you next week.
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