As a society, we seem to be obsessed with setting records. Just look at how many editions of the Guinness World Records books have been published! We are fascinated by historic events, athletes pushing their limits, and new inventions that have changed the course of history. Well, there are plenty of records being hit in the financial world as well. 2017 was a year of consistent record highs for the Dow Jones and S&P 500, (1) and on Wednesday, August 22, 2018, our current bull market officially became the longest bull market in history. (2) This is great news, but what does it mean for you and your money?
Bull Markets And Your Financial Plan
Here’s what we know: The stock market has been going up for a long time now. Sometimes slightly, sometimes sharply, but always up. Let’s say all the experts got together and decided we aren’t in the longest bull market in history. Would that change the fact that stocks have been going up for years? Would it change the performance of your own portfolio? No, it wouldn’t.
What really matters when it comes to your money is how you react to the market cycles. We know that what comes up must come down. We have experienced an incredible nine years of growth and an improving economy, but it won’t last forever. While a market downturn will happen eventually, it’s impossible to predict the exact timing. It is important to recognize the reality of market cycles and prepare for the inevitable downturn. Here are some tried-and-true financial principles to keep in mind as you prepare your finances for whatever the market does next.
Commit To A Long-Term Perspective
The markets are always changing. If you check your portfolio performance every time there’s a shift in the markets, you will end up feeling overwhelmed and stressed. If you maintain a long-term perspective and stay disciplined in your approach, especially if you’re more than ten years away from retirement, you can feel confident in your plan.
Rebalance Your Portfolio
With the markets performing as they have been lately, chances are your asset allocation has gotten a little off. The high returns that parts of your portfolio are generating are shifting your portfolio off balance, with some investments growing much faster than others.
Though it may seem counterintuitive to sell off your winners, rebalancing is a wise and proven investment strategy. You need to rebalance your portfolio by selling some of your overachievers to purchase underperformers. This will keep your portfolio from having more risk than you are comfortable with. What was once only 10% of your portfolio can easily grow to 20% or 30% in a bull market like this. Readjustments may be necessary.
Don’t Get Greedy
Fight the human tendency toward greed. As we’ve already mentioned, high returns can be enticing. Rushing after them, though, can lead you to a dangerous place!
Make a conscious effort to avoid the hype and stick to your investment plan and corresponding asset allocation. Remember the risk tolerance level that you established for yourself. If you’re unsure how much risk you are prepared to take, sit down with your advisor to determine your unique risk level.
Don’t let record highs tempt you into making poor decisions. Remember, the investments that shoot up are usually the ones that drop the lowest when the markets do take a turn for the worse. By avoiding greed and rebalancing your portfolio, you will put yourself in the best position in the case of a market downturn.
Be Prepared For A Correction
Your portfolio isn’t the only thing you need to prepare for a bear market, though. You need to prepare yourself mentally. When the market goes up for as long as it has, it’s easy to start taking it for granted and expect it to continue. Many people are caught off guard during market corrections and let fear and anxiety take over.
Don’t let your emotions get the best of you. As long as you are following sound investment principles, only investing long-term money, and keeping your assets within your risk tolerance, you should have no reason to panic. Yes, things may drop momentarily, but you can keep worry at bay knowing that you are in it for the long haul.
How I Can Help
If you’re worried that your portfolio isn’t built to withstand whatever the market does next, maybe you could use a portfolio review. I can help you create clear financial strategies and financial confidence regardless of which kind of market we are in. Book an appointment online for a no-obligation conversation. I can show you how to take advantage of this great bull market while staying prepared for the next bear market. Contact me by emailing email@example.com or calling (703) 549-5447.
Steve Harvey is a financial advisor with more than 34 years of industry experience. He is also the founder of The Harvey Group, an independent investment consulting firm based in Alexandria, Virginia. He works closely with middle- and upper-middle-class families to help them address their critical financial planning challenges, from investing with confidence to planning for retirement. Based in the Washington, D.C. area, he works with clients throughout Virginia and Maryland. Learn more by connecting with Steve on LinkedIn or visiting www.steveharveyllc.com.