If this bear market has found you unprepared, how can you best prepare for the next one? Here are some ideas –
- Have a written financial plan — one that is appropriate for your time horizon, risk tolerance and financial goals.
- Your plan should contain an investment strategy to follow in good times and bad and should include periodic rebalancing. It’s important that you understand your strategy so that you can stick with it the next time the spaghetti hits the fan. Your focus should be on your plan, not on what the market did yesterday or today or what it might do tomorrow. Nobody enjoys a frightening market decline but selling into a panic means that you’ll be on the sidelines during the initial upward swing of the inevitable recovery — whose timing and magnitude are impossible to predict. The most important factor in your financial plan is your commitment to fund it. The growth will take care of itself long-term, but insufficient funding is a recipe for failure.
- Your portfolio should consist of liquid, high-quality transparent assets that you understand, not complex investment products that are full of promises and short on details.
- If your portfolio consists of a junk drawer collection of stocks and financial assets purchased long ago for reasons long forgotten, it’s time to take remedial action. Your portfolio should contain an appropriate allocation to high-quality fixed income investments – regardless of their current yield. They are out-of-favor when the market is rising but act as shock absorbers when panic hits Wall Street. My strategy for those about to begin retirement is to have enough fixed income investments to finance at least a decade’s worth of portfolio withdrawals. It is hard to put a value on the peace of mind that comes from knowing that you have adequate fixed income assets to outlast a bear market.
- Remove individual company risk from your portfolio.
- Own the global stock market, not just selected segments, countries or geographical areas. Individual stocks bring unnecessary additional risk into your portfolio. I don’t care if Grandpa worked for the company. I don’t care if it’s been a blue-chip standout for a hundred years. Any company is a year away from being ground into powder by mismanagement and handing it shareholders a 100% loss.
- The only metric that matters is your progress towards your long-term financial goals.
- Therefore, annual reviews are an important component of financial planning to ensure that you’re on course to achieving those goals.