When I look at charts for the US stock market, it reminds me of some of the Mt. Tam trails that I hike. It seems as if the uphill will never end. And then, it does end, just as I turn a bend. The walking sticks come out of the daypacks of my hiking friends, and we catch our breath and become conscious of how much more treacherous the trail becomes as gravel scatters under our boots and rocks we use as stepping stones teeter. I wish all investors had their own investment walking stick equivalent. They don’t. They are, however, not without tools and a process to avoid market risk.
Review Your ENTIRE Portfolio – If you’re like my clients you have 401(k) accounts in multiple locations, possibly a brokerage account, and you may be working with more than one bank or credit union. My first step with new investment clients is to determine their current level of risk for volatility. I use advisor-based Morningstar software to aggregate all the individual mutual funds, stocks, bonds, cash (savings and money market accounts) to determine the asset allocation, including the mix of stocks and bonds. And, based on past performance, something that offers no guarantees, I identify the range a portfolio might fluctuate at the best of times and the worst of times. Then I review the results of my risk tolerance questionnaire, to see how closely the clients’ risk and the portfolio’s risk match. Does my clients’ stated willingness to ride out a market downturn match what a portfolio with a similar asset allocation has done in the past?
Rebalance the Existing Portfolio – Often my clients come to me with neglected portfolios that resemble their portfolio model about as well as some of my out of date trail maps match the local scenery. In that case, I design a portfolio model. And, if they are existing clients, I only have to determine how much of each holding to buy or sell to bring the portfolio in line with the existing model. This should be done once or twice a year, ideally.
If all is well in the stock market most of my clients are satisfied. I am only satisfied if we’ve identified how much cash they need each year from their portfolio, or for an emergency fund, and have at least enough cash to prevent them from having to sell mutual funds and exchange traded funds for six, twelve or 24 months. I want them to have the cash they need to comfortably wait out a market downturn. The added bonus is that if the market is turbulent, they sleep better. Sometimes taking the appropriate precautions is not enough to soothe their nerves.
Reconsider or Change the Existing Portfolio – That doesn’t mean we sell everything and put it in cash. It means we reduce the volatility of the portfolio by changing the asset allocation. And, since we have done a retirement projection I can show them the impact on their retirement savings by reducing the return on investment. And, by changing the asset allocation, I make the appropriate changes to the portfolio model.
And then, it’s time for my clients to relax knowing that while the road may get rocky, they’ve taken important steps to protect their savings and investments. If you would like help with this process, I recommend you talk to an hourly financial planner. No names of course.