Every Floridian knows when the hurricane tracker tells you you’re in the “Cone of Uncertainty”, it’s time to read Tampa area Chief Meteorologist Denis Phillips’ seven hurricane rules. But what if Denis Phillips was a financial planner rather than a meteorologist? What would he say about the market? I imagine a calm, Denis Phillips-like financial advisor has seven similar rules to follow when the market goes crazy. They might go something like this:
Rule #1: Market forecast errors past three days can be huge
Actually, even daily market news varies widely between bull and bear perspectives, and if you read three headlines in a row, you’ll go crazy. Remember: market commentary is written primarily for the purpose of generating clicks. If it was dull and calming, people probably wouldn’t click on it. As we like to say: buy companies, not headlines.
Rule #2: Models flip-flop back and forth all the time
Look for trends; don’t look at individual model runs. This speaks to our principle: be an investor, not a trader. Traders look for little signals and signs that it’s time to buy or sell. They look at conflicting models and pictures in graphs that they believe are informative. But if the tea leaves were so reliable, how would you beat the rest of the traders to the punch? Instead, look at long-term trends and potential changes in structure for the companies you want to invest in. Look for strength and longevity. Don’t gamble with ticker symbols; invest in income-producing enterprises.
Rule #3: If you didn’t prepare in June (or any other time before that), do so now
Denis Phillips is talking about your hurricane kit, but we’re talking about your retirement plan. The best time to start saving for retirement is the day you receive your first paycheck. But if you haven’t done that, the second-best time is right now. There’s no magical formula to building wealth. It’s simple: spend less than you make. During Hurricane Irma, I evacuated the house when the water reached the edge of the house at 4am. Don’t be like that with your finances. Don’t be like the guy who borrows a generator on the fifth day the power is out (also me). Plan ahead and start today.
Rule #4: Don’t freak out
Would you pay double for a pair of shoes and then sell them for half that price? Buy high and sell low doesn’t even sound right until market valuations drop and you’re seeing red. Then it’s only natural (and even instinctual) to want to flee the market. But buying high and selling low is the one guaranteed way to lose money in the market.
Markets can be volatile in the short term. Having a long-term strategic asset allocation plan—and sticking to that plan through periods of market volatility—can keep you on the right track when it comes to reaching your financial goals. You have a plan. It includes the downs as well as the ups. Stick to the plan.
Rule #5: Don’t freak out, ok?
Market corrections can cause a lot of anxiety. But it’s important to remember that market pullbacks are not uncommon, occurring in most years. In fact, these market corrections can be a healthy way of resetting investor expectations and stock valuations within a longer-term market advance.
The market, on average, will see:
- Five 2% drops in a year
- One correction, which is 10% or more, per year
- A 30% or more drop every five years
Believe it or not, a 14% drop is average—even for the good years. The odds that the market will never recover? You’re more likely to get hit by a hurricane.
Read more about Investing in Turbulent Times.
Rule #6: If things get bad, know that your financial advisor is here for you
You’re going to hear a ton of information, and you’re going to read sensational headlines. You’re going to see red. It can get confusing. Give us a call and we’ll help you sort it out.
Rule #7: Stop freaking out… until we tell you to
Denis Phillips, if you happen upon this humble post, thank you for helping us keep cool heads every time a cloud crossing the farthest Eastern portion of the Atlantic is predicted to be our sure and impending doom. Hopefully, we can help provide the same peace of mind to those who look to us when their finances feel threatened.
If you are concerned about your current strategy, send us a message. We would be honored to take on the job of being your trusted, reassuring financial planner.