I got an email from a client last weekend asking a variation of this question: what the hell is happening, and should we sell our investments and put our money somewhere safe?
It's an understandable sentiment. Things feel bad right now, which makes people worry, which makes them want to do something. And, in terms of scratching the "I need to fix this right away" itch, selling all of your investments sure feels like doing something.
But is that an effective approach to getting what you want?
Sometimes springing into action without time to think makes you miss better, more effective options. That's what we'll look at in today's newsletter.
Let's get this out of the way right now: the new/old president loves chaos, but he also loves the stock market. In fact, it might be one of the only things that gets him to pause or reverse course.
So despite all of the insane news, I'm actually not super worried about the stock market right now. It's going to do what it does, which is always volatile in the short-term and rewarding in the long-term. (Think in terms of years and decades, not months or quarters.)
Now, it's entirely possible that all the other craziness will have secondary and tertiary effects that cause a stock market crash or a full-blown recession. So back to the question at hand: what should you do if you're worried that all of this chaos will turn into a crisis?
Let's pull out our prepper hats and spend a minute on general crisis readiness. Regardless of the political climate, the possibility of weather-related emergencies like hurricanes and wildfires means that you should be thinking about power outages, lack of clean water, or the necessity of suddenly leaving your home. So stocking up on basic things like bottled water & shelf-stable food and packing a "go bag" with important documents and some cash is just kind of common sense at this point, regardless of whatever else is in the news.
Now back to your money. Let's think back on a crisis or two from recent history for some guidance on how to prepare for a potential crisis in the future. If we could go back in time and prepare for the pandemic or the 2008-09 housing market bubble, I want to propose that selling your investments was a bad idea and changing your investment strategy was not the top priority.
First, hindsight being what it is, we know that the smart move in the pandemic, the housing market crash, the dot-com bubble, and pretty much as far back as you want to go was to just stay invested the whole time. That's because no one knows when the market will go up or down, and study after study shows that even missing just a handful of the best days in any 20 year period could cut your money in half.
So what should you do?
If I could redo the months leading up to the pandemic, you know what I would do? Start saving a bunch of cash. Whether that's in your checking account, savings account (preferred), or under your mattress, having a bunch of cash adds so much stability when shit hits the fan. You'll feel like a total genius if you have that money available when you need it.
The next thing I would do is eliminate as much high-interest debt is possible. If the economy fails and people are at risk of losing jobs, having large monthly debt payments becomes a real problem. And I would prioritize paying down high-interest debt – like credit cards – first because paying the monthly minimum does not prevent them from spiraling out of control, which is a huge liability in a crisis. Even though things like auto, student, and home loans come with big price tags, those debts will eventually be eliminated exactly on schedule as long as you keep paying the monthly minimum. Not so with credit cards.
So the first thing I would prioritize to prepare for a crisis is lots of extra cash and the second thing is to eliminate as much high-interest debt as possible. And, while this probably isn't what you want to think about right now, you should also have some end-of-life plans in place like a will, legal & medical powers of attorney, and named beneficiaries on all of your accounts & insurance policies.
If you have those three areas covered, you're already doing great.
Ok, now that all of that is out of the way, we can look at investments.
I already said that the best move is to stay invested through a crisis, and the last thing I want you to do is turn all of your investments into cash. But it still feels pretty bad to watch your account balances drop. So what should you do?
Instead of thinking in binary, all-or-nothing terms, I want you to choose investments that you can own for the rest of your life. Part of that equation is making sure you have a mix of stocks & bonds that matches your risk tolerance and timeline. If that means your portfolio isn't optimized for growth, so what? It's better to have a good plan you can stick with than a theoretically better plan that stresses you out.
Stocks tend to be more volatile in the short-term, with more growth in the long-term; bonds tend to be more stable in the short-term, with less growth in the long-term. By aligning the mix of stocks & bonds with your risk tolerance and timeline, you'll be more likely to stick with it for the long haul. And staying invested for a long time is every investor's secret super power.
So if you're feeling jittery, this is an excellent opportunity to revisit your current investment mix to decide if you'd like to dial back your risk exposure. Again, don't turn your investments into cash in a panic. Instead, downshifting to a lower volatility mix that helps you stay invested for the long haul is the smart move.
Whew, that's a lot to take in! I hope that makes sense, but please drop me a line if you have any questions or want to review your situation.
Thanks,
Timothy Iseler, CFP®
Founder & Lead Advisor
Iseler Financial, LLC | Durham NC | (919) 666-7604
Iseler Financial helps creative professionals remove stress while taking control of their financial lives. We'll help identify current your strengths and weaknesses, clarify and refine your long-term goals, and prioritize decisions to improve your financial well-being now and later. Reach out today to take the first step.
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