Hey guys, Mike Frontera here, back with another edition of Retirement Theory. Well once again the stock market seems to have stolen the show! You may be wondering what the heck has happened in these past few nasty weeks in the market and what we can expect going forward.
As I’ve always said, I’m not in the predicting business. I will leave that to the so-called investment “geniuses” out there. I mean, I could try. Back in January of 2016, I talked about regurgitating my knowledge of recent financial news and market data to come up with a plausible prediction for the direction of the market.
I could throw something together about Trump’s tariffs and the trade war with China. Maybe mention President Xi. Bringing up foreign leaders does always make you looks smart. Talk about the inverted yield curve and its predictive value for recessions, possibly. But the truth is that I, nor anyone else, has any clue of what the market will do over the next few months. So to try to line up a bunch of economic factors together like some sort of equation to say when is or is not a good time to be in the stock market is a waste of everyone’s time. People don’t need useless prognostications. They want to know "will I be ok?" Is my portfolio allocated toward my goals, and how might a downturn affect my plan?
So let’s spend a few minutes talking about why we invest in the stock market, and how to handle a downturn when they inevitably show up.
So first of all, we invest in the stock market because of the outsized returns that they can offer us versus low or no risk assets. We often need these higher returns to help our savings successfully fund a major financial goal. Like retirement.
As Dr. Brian Portnoy says in his book “The Geometry of Wealth” “Wealth…is funded contentment. It is the ability to underwrite a meaningful life.” The stock market helps us do just that. Hey, if we could achieve a high enough rate of return from banks or treasury bonds, there would be no reason to take any risk.
So we need to think of our use of the stock market as a tool. And our portfolio as a toolbox. And like a hammer in your toolbox, the stock market has a very specific function within your portfolio. That function is to provide long-term growth, and inflation protection. What it doesn’t do well is provide a steady store of monetary value. The portion of your portfolio invested in stocks, really should not need to be accessed for several years. It’s just too uncertain otherwise.
When you go to pull money out of your portfolio, it should be out of an area that keeps its value pretty darn steady. Maybe short-term bonds, for an example. There’s a tool that tends to have much lower volatility. Long-term returns though…not so great.
OK, so going along with this toolbox analogy, you want to visualize your whole portfolio as a collection of tools that each has its own job. You see the market having a nasty few weeks as it has, don’t look at the collective portfolio and think “oh no, I’ve lost ten thousand dollars.” Seeing your portfolio as this big number that goes up and down is likely to cause you more stress than is necessary.
When done properly, your portfolio should be constructed as a diverse set of tools. And some tools, like the ones in the stock market may experience big drops from time-to-time. But heck, that comes with the territory with that tool. But others, those that you use to access money in the near term, should hold their value much better. But on its own, it’s not going to grow your portfolio large enough for long term sustainability. Each holding in your portfolio has a job that it is supposed to do.
The key then, is to properly allocate the tools in your portfolio to your individual needs. What goals do you have, and when do they need to be funded? That not only can help get you properly allocated, but it can also help keep you disciplined during times of stock market stress.
So…do you have questions for me? Let me know. Give me a call at (518) 612-1060, or just visit www.retirementtheory.com . Do you follow me on Facebook? I think that you should. You'll see videos like these, and get blog and article shares on everything retirement planning. Once again, thank you for joining me. See you next time.