Photo by Paul Flessland
Rising asset values in the stock and housing markets and low volatility could be tricking investors into a sense of complacency. To mitigate unanticipated risks, investors will need to revisit their financial strategy.
While we see low volatility today, history has shown us that high volatility typically returns. Yet, still, in low-volatility markets, we sometimes see investors tripped up by a false sense of security.
With U.S. stocks in the second-longest bull market and economic expansion on record, it’s only a matter of time before we enter into a recession and bear market.
It’s hard to predict when the market will turn, but now is the time to prepare yourself financially for a bear market and recession regardless, especially since we know this shift is inevitable. These six tips can help you remain on top of your finances and avoid encountering any surprises when the markets turn.
What Do You Know About VIX?
Volatility in itself doesn’t signify the end of a bear market. We need to put it into context.
One measure of volatility is the VIX volatility index. While the VIX average is about 20, if we go back and look at the 2008-09 Great Recession era, it spiked to 80! And while there was a recent spike to around 40, it currently sits at about 12.
Historically, we’ve seen:
- Three corrections of 5 percent
- One 10 percent drop in a year
- Every three years, a drop greater than 20 percent
6 Steps to Take
After years of a bull market, a bear market and economic recession could be around the corner. It’s time to prepare.
1. Revisit or create your financial plan.
As flight attendants remind us: “Items may have shifted during flight.” The same goes for your finances — hopefully for the better. Right after tax season is a good time to update your game plan. Take the time to “stress test” your portfolio. Stress testing involves simulations for different market environments such as rising rates, higher inflation and market pull-backs.
2. Beware the savings trap.
Rising asset values in the stock and housing markets can lead investors to gloss over the basics. At times, it can be easy to see your net worth jump because of a combination of a booming stock market and skyrocketing real estate prices, but that could lead to bad behavior such as the belief that you don’t have to save more money. Some investors faced that problem in 2006 with rising real estate values, only to see real estate drop in the ensuing years.
3. Rebalance your diversified portfolio.
There is no better time to rebalance your portfolio than when stock markets are calm and rising. As one asset class outgrows another, your weights and risk can be lopsided, making rebalancing even more important.
4. Stop trying to beat or time the market.
Despite evidence that it’s nearly impossible to beat the market consistently over the long-term, many investors still delude themselves into thinking they can do so. The same theory goes for those who may also be sitting atop some cash and waiting for the “right” time to put it to work. Who knows when that will be? Although you may invest at the seemingly “wrong” time, putting your money to work brings you one step closer to reaching your goals.
5. Maintain a healthy emergency reserve fund.
For those still working, maintain 6-12 months of expenses (12 -24 months for retirees) in a safe, liquid account.
6. Pay down debt.
There’s nothing like a recession and bear market to expose the dangers of carrying too much debt.
There is no better time to rebalance your portfolio than when stock markets are calm and rising.
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