“Every time someone says, ‘There is a lot of cash on the sidelines,’ a tiny part of my soul dies. There are no sidelines.”
–Clifford S. Asness AQR Capital Management
In our recent articles about market volatility, we have encouraged you to be aware of near-term market action and to stay put according to your personal financial goals. Easy to do in theory, but what if you’ve jumped to the sidelines during former market downturns or just never invested your earnings since the last crisis?
How – and when – do you make amends with a market you’ve once abandoned? To quote Buckingham Wealth Partners’ Director of Advisor Development, Tim Maurer: “The market doesn’t know when you got out, and it’s not going to tell you when to get back in.”
Overcome Your Instincts
First and foremost, if you have made past decisions to “sit this one out,” don’t beat yourself up over it. Behavioral finance has shown how often our most powerful instincts trick us into leaning away from market risk long before we’ve mulled it over at a cerebral level. After all, we wouldn’t be around to begin with if our ancestors hadn’t been fast on their feet in a crisis. Whatever steps you have or have not taken in the past, no judging is our mantra.
Once you exit the market, deciding when to jump back in can be nerve-wracking. As we publish this post, it’s been 20 years since the NASDAQ topped 5000 and the Dot.com bubble peaked and it’s been 11 years to the month since the painful market bottom of the 2008-09 Credit Crisis.
Is the current pandemic crisis an opportunity to get back in the market at levels way off our 2019 highs, or are we poised to head into a deep recession? Is it too late or too early? If you do reinvest now, should you go all in or just dip your toe in?
All good questions. But before we get too tangled up in them, let’s take a step back and view the wider perspective.
Every Day Is a Good Day to Invest
Regardless of past victories or defeats, rewards or regrets, the best way to think about the market (and perhaps much of life) is with fresh, blank-slate resolve. That is not easy today, however. As inventor Charles F. Kettering is reported to have said, “My interest is in the future because I’m going to spend the rest of my life there.”
You may be unable to fix past damage done or predict what tomorrow holds, but you can and should plan for your brighter future. Let optimism reign, even in light of big challenges ahead. Instead of gazing too fixedly at the past or getting worked up about breaking news, we recommend adopting the exact same approach we recommend for any long-term investor: Manage what you can; disregard what you cannot.
Take a look at where you’re at today.
Take inventory of where you are today, what resources you have on hand and what your risks are both personally and professionally. Focus on where you and your family stand in relation to your personal financial goals and what it might take to achieve them.
Fortify Your Emergency-Opportunity Reserve Fund
Your first investment should be in a fully FDIC insured account holding many months’ worth of essential spending. You may want to expand it now given we don't know the depth or length of what stands before us. Look to our previous blog titled, Critical Reasons Why You Must Have An Emergency Fund for our thoughts and guidance.
Put your Emergency Funds in an account that is fully insured up to the full FDIC insurance amount. If your emergency fund exceeds the $250,000 individual level along with your other assets at that institution (checking, other savings, retirement assets, etc.), look to offerings which cover a larger amount.
Cogent has partnered with Flourish Cash, who offers brokerage accounts that invest in up to eight different banks. Additionally, they offer coverage of up to $2 million for individuals, $8 million for households and $1.5 million in coverage for business entities. Reach out to us if you're interested in this option for your personal or business reserve assets.
Adopt an investment strategy grounded in the evidence.
Consider how capital markets are expected to deliver wealth to patient investors, and adopt the Science of Investing for your all-too-important investment assets. Sometimes the market and the world at large will litter our path with obstacles to overcome. Global markets have been experiencing increased volatility lately, which comes in stark contrast to the even, steady growth we often expect over the long-term. Look to resources such as these videos from Dimensional Fund Advisors or our colleague Larry Swedroe, for how to do it right.
Build and sustain your portfolio according to your personal circumstances – including your personal risk tolerance.
To generate new wealth, you may want to invest anew in the market’s risks and expected returns. But – and this is key – you may also want to temper your wealth-building goals with an ample, safety-net allocation to preserve what you’ve already got.
You know from experience that you’ll be tempted to abandon course during the next market downturn. By minimizing your risk exposure, you’ll be better prepared to withstand it when (not if) it reappears. Your Investment Policy Statement should be developed in reflection to your unique circumstances, your ability, willingness and need to take risk.
The Market's Response to Crisis
Should you be tempted to repeat past retreats during future market downturns, consider the following illustration. In the aftermath of past global crises, one of the best long-term strategies for globally diversified investors has been a do-nothing strategy. By staying invested through thick and thin, disciplined investors have been able to let the markets do the heavy lifting for them along the roads to recovery.
In short, if you’ve been waiting for a signal that it’s time to rebuild your portfolio according to your distinct goals and risk tolerances, think of this article as your personal recovery plan. During a crisis, we all want to do something, not watch as things unfold. These 20 Steps to Take to Prepare for a Recession is a good place to start.
Cogent Strategic Wealth is here for you.
Life is uncertain. The market is even more precarious. This means building wealth has no shortcuts. Success requires a solid investment approach, a long-term perspective, and discipline to stay the course. Instead of leaving your financial future to chance, you need to have a plan.
Instead of worrying about your future, take positive steps to protect it. Set up a Cogent Conversation with us today. We’ll show you how to transform your hard work into durable wealth even through troubling markets.
Having someone in your corner with your best interests in mind is incredibly important. At Cogent Strategic Wealth, we are fiduciary advisors, who work with families like yours every day to convert their dreams into plans, and their plans into reality. Contact us today so we can help you, too. Your money and your future hangs in the balance, so let’s get to work!
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