"Everyone has a plan 'till they get punched in the mouth," said famously by Mike Tyson. Now I don't want to be a pessimist but we cannot ignore the fact that within the next decade or two a bear market will occur in U.S. equities and to pretend it will not happen is foolish. Investors collectively believe a bear market is a condition in which an asset declines more than 20% from the peak or all-time high. The average length of a bear market is 367 days. The conventional wisdom says it usually lasts 18 months. Bear markets occurred 32 times between 1900 and 2008. Nobody knows when the next one will happen, however we must have a plan in place to prevail both financially and mentally.
The steps you take today to prepare are going to save you from scrambling in the future. I'm not telling you to get a bug out bag or start making shorts but what I will tell you is that your personal financial plan will be the core to your success. The three steps you can take today to prepare for a bear market begins with your investment approach, secondly your liquidity, and lastly your reliance on current sources of income.
1. Investment Approach: Take a look at all your investments, 401(k), IRA, Trusts etc. and quantify your current risk using a set of metrics. I suggest a software like Riskalyze which helps pinpoint your exact portfolio risk. This type of analysis will give you the "I am Here" moment and from there you can start designing a roadmap to navigate turbulent markets. It's also important to recognize and earmark accounts with specific time horizon goals, for example if your 30 something it's not as important to dial back risk in your IRA as it would be for someone whose in their early 50's. The old saying time in the market is more important than timing the market applies in large to younger investors. Therefore, investors with a matured portfolio are at greater risk of derailing retirement if they do not prepare for a bear market with a contingency plan in place such as implementing an options overlay to effectively exit positions and mitigate tax liabilities.
2. Liquidity: If you have real estate investments, privately held ownership in businesses or franchises then you know liquidity will dry up in times of market upheaval or recession. Designing an effective plan to mitigate those risks starts with your planning today. Liquidity risk is the risk that stems from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss. Therefore, you need to ensure a portion of your net worth is kept safe in liquid assets at all times, such as money-markets or savings. This type of account should be earmarked as an 'emergency fund' for you or your business. Liquidity also goes hand in hand with leverage. The problem with leverage is that debt can be a crushing burden during a challenging economic period. Remove as much leverage from both your investing and your life to avoid major financial problems during a bear market or poor economic periods.
3. Income Streams: This one hits home for me, during the 2008 financial crisis I saw the impact of losing an income stream and it jeopardizes peoples lifestyle. My one piece of advice if your under 30 is to create a secondary source of income for yourself rather than rely on one sole income stream, this will act as a cushion if a recession hits and you lose your bonuses or worst case your job. It will also provide a diversified source of income. On average, the wealthy have multiple sources of income and this can be true for you as well. Read more 7 Income Streams
These three steps are only the tip of the iceberg, moving forward you should have a written plan with your advisor to navigate turbulent times and ensure your financial peace of mind is not swept away. Take advantage of a FREE Portfolio Risk Analysis today: START NOW
- Timothy Hooker, AIF®
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