Keith Akre, a trust officer at Stillman Bank, advises on how to prepare for potential stock market plunges and other unforeseen challenges in stock market behavior.
The only true answer is that no one knows. Use that to your advantage.
As we approach the 10-year anniversary since the stock market low in March 2009, this has become one of the longest runs in the stock market without a drop of at least 20 percent.
Historically, the market has experienced such a decline every five years or so. This leads people to believe that a correction is coming soon. People often ask me when this correction will come. The only honest answer I can provide is “no one knows.”
“It’s tough to make predictions, especially about the future.”
Guessing at when the market will do something is an attempt to predict the future. And, as Yogi Berra puts it, “It’s tough to make predictions, especially about the future.”
Even highly intelligent insiders cannot successfully say what the future holds. For instance, in March 2007, Ben Bernanke, then chairman of the Federal Reserve, made the following statement: “The problems in the subprime market seem likely to be contained.” It turns out he was off in that assessment. The problems of the subprime market took less than a year to plunge us into the global financial crisis.
In another example, hedge-fund manager John Paulson, famous for making a fortune during the financial crisis, followed up his success with another prediction. He put the bulk of his investments into gold on the belief that inflation would spike, causing gold prices to skyrocket. The inflation never came and gold is down more than 35 percent since 2011. Paulson’s hedge fund went from $38 billion down to $9 billion over that period.
“You can’t predict. You can prepare.”
Instead of trying to predict the future, investors are better off heeding the advice of legendary investor Howard Marks, who says, “You can’t predict. You can prepare.”
We don’t know when the market will go down 20 percent or more. We do know that it’s possible, and within the next five years, it is even likely. Knowing this, we can prepare for that possibility. How do we do that?
• Stress test your investments – Assess how your portfolio would be impacted if the stock market dropped 20 percent, 30 percent or 50 percent. If the results would derail any chance of meeting your future financial goals, you need to reduce your risk.
• Plan ahead – Look out over the next five years and see how your portfolio could stand up to negative returns over that time. If you are currently in accumulation mode, such as a 30-something contributing to a retirement account, you can safely keep the risk high. If you are retiring soon and will need to rely on your investments to provide cash flow, you should have a portion in conservative assets that will hold value in a correction.
• Diversify – We may not know when the stock market will drop, but we can identify a few potential causes. Will it be inflation picking up? Rising interest rates? There are ways we can allocate assets to benefit in those scenarios. Therefore, if stocks go down, other assets will perform well.
Many investors work hard trying to figure out what stocks will do in the future. Most of them will be unsuccessful and the vast majority of the ones that get it right are just plain lucky. No one knows for certain what the future holds. Take advantage of this information by not trying to play the market-timing game. Don’t guess at what will happen; prepare for what could.
Keith Akre, CFA, CFP®, is a Trust Officer at Stillman Bank, with locations in Byron, Oregon, Rochelle, Rockford, Roscoe and Stillman Valley.
Opinions expressed are solely his own and do not express the views or opinions of Stillman Bank. Investments available through Stillman Trust & Asset Management (1) are not FDIC insured (2) are not deposits, obligations, or guaranteed by the bank and (3) are subject to investment risk including possible loss of principal