Is Now the Time to Make Sure You Aren’t Out Over Your Skis?
I recently went water skiing for the first time, and it was an incredible experience. However, I will admit that I spent most of my afternoon with my water skis pointed to the sky. And when you are trying to ski, that is not where you want to be! So, what was my problem? I had a really hard time getting out of the water. I was told that most newbies make the same mistake. Every time the boat started moving, I would rise out of the water and pull my arms back on the rope which led to a wipe-out seconds later.There were several experienced water skiers on the boat that instructed me to, “lock your arms”, “don’t pull back” and “let the boat pull you”. That all sounded simple enough. But as much as I tried to follow their coaching, my natural inclination was to pull my arms back each time I tried to stand up. I learned the hard way as I got pounded in the face, swallowed buckets of lake water, and found it necessary to protect my man parts when my butt bounced and dragged repeatedly off the water. It took me nearly 15 times to finally stand up on my water skis.
Do you know what happened when I was finally able to stand up on my skis? I coasted along on the water, smiled at my cheering section on the boat, and then realized that I didn’t know what to do next! I was finally where I needed to be, up on the skis, but since I didn’t know the next step, I crashed into the water again. Overall, it was a fun day out on the lake. There was a lot of laughing and cheering from the boat. I did finally learn to cruise on the water for several seconds and enjoy the ride. I wasn’t too sore the next morning and the experience was worth it so I cannot wait to go again.
I share this story because I had some time to think as I bobbed in the lake waiting for the boat and handle to return after each wipe-out. I started thinking about how water skiing can illustrate a mind-set many people have when it comes to investing. One of the hardest aspects to overcome is that natural tendency to “pull back” when the water is pounding your face and you can’t seem to get your butt off the water.
Some people give up entirely and don’t feel like they have the tenacity to stick with it. The same is true with investing. When it feels like the market is pounding us in the face like it did at the end of 2018, the natural tendency can be to pull back and become more conservative, to stop investing additional capital or to get out of the market altogether. On the flip side, when the market is performing well and we feel comfortable, the natural tendency is to become more aggressive with investments, invest additional capital or even take on debt to invest as we see the overall market rise.
In recent weeks, U.S. markets have reached all-time highs surpassing the previous highs in September 2018. Over the past 9 months, the U.S. market as measured by the S&P 500 has taken investors on a volatile ride with a drop of nearly 20% from October to December which was then followed by a 27% rise from the low in December through the end of July. Now that U.S. markets have recovered from their losses, it is important that investors review their portfolios to ensure they are positioned properly for the next market downturn or recession.
Over the years, I have found one of the most successful ways to put a portfolio risk and reward into perspective is by illustrating a true dollar amount for each client so they can visualize their loss in a recession and their gains in a good market. I have chosen to integrate a third-party software called Riskalyze with all my clients. Riskalyze will analyze and will stress test each client’s portfolios through various market conditions. Both my clients and I find value in this analysis because the software uses hard numbers rather than percentages. In my experience, that is much easier for most people to connect with. For example, if I were to explain to a client that has $750k invested that they could possibly experience a loss of 18.6% over a 6 month period during the next market recession, it may not resonate as much as if I tell them that they could lose $140,000 in value over a 6 month period.
Here is an illustration with a range of expected results:
Every individual will have a different response to this illustration. Some people will look at this type of loss and not feel anxious because they know the history of the market and can wait for the next upturn. Others will find this too stressful and unacceptable. Besides the emotional aspect of a market downturn, we must also pay attention to an individual’s need to access money from their account.
The average market recession lasts between 12-18 months with the average recovery lasting about 18 months. Taking that into consideration, it could take up to 3 years for the market to recover from the next market recession. For an individual who is living off their portfolio, it is important to have enough investments in cash-like assets such as savings, CDs, money markets and certain bonds. As I mentioned previously, now is a great time to have these conversations. Although I am continuously having conversations with my clients, it alleviates a sense of urgency and stress to make these decisions when the market is doing well. Most people tend to continue with the status quo until they see the market take a dive. They become reactive at that point and feel the need to make an adjustment but that can end with less than optimal results. Becoming proactive inside your portfolio and discussing an individual plan for retirement will achieve the best results.
