What do you want to hear?

“When will this bull market end?”

“When will the next recession hit?”

“When will the next stock market crash occur?”

“What happens if…….insert your political/economic/future crisis/concern of the day?”

These are all questions that we get asked as financial advisors.

Unlike car salesmen or time share sellers who tell you what you want to hear, we feel it is our obligation to tell you what you need to hear.

It would be terrific if we knew the exact timing of when the bull market will end, when the next recession will occur and when the next stock market crash will occur, but unfortunately, we don’t have perfect crystal balls readily available!

We can not accurately, successfully and consistently predict the future.

Unlike others who may try to forecast, research and try to predict the answers to questions like these, we prefer to be honest and straight forward.  We will educate you, based on facts.  We will give you guidance and our thoughts.  But we will not pretend to tell you things we do not know and cannot predict.

Before we answer these questions, we want to provide some historical data on possibly why you should be a little less concerned about future financial downturns.

As the chart* below shows, a globally diversified and balanced portfolio of 60% stocks and 40% fixed income bounced back and recovered quite well from selected financial and world events which occurred between 1987- 2011, within the following 1-3-5 years.

Data shows that regardless of whether these events could have been predicted or foreseen, within a number of years, a globally diversified and balanced portfolio in nearly all cases had strong returns in the succeeding 3 years and very strong returns in the following 5 year periods.

Since we know that we cannot predict the future, historical financial evidence like this provides guidance to us as your advisor not to try and time the financial markets. As stock markets go up way more years than they go down, trying to make predictions and getting out of the market would likely do greater damage to your financial future.

This is why we work with you to develop a rational investment policy for your specific situation that allocates your assets between stocks and fixed income, so you can handle the future financial downturns that will inevitably occur. This type of financial planning is far more helpful to you than trying to make predictions and financial moves based on forecasts.

“When will this bull market end?”

We don’t know. But we do know that since World War II, there has generally been a 20% decline in large US company stocks once every 5 years. And then the stock market recovers and reaches new highs.

The key concept is that in the future, there will be more declines. There will also be greater new highs. This is why we recommend viewing your investments over long term periods and why, if you will be needing money from your investment portfolio to live off of in the near term, we would allocate a significant part of your portfolio to fixed income investments.

“When will the next recession hit?”

We don’t know. Economists are terrible at predicting recessions, which are technically defined as two consecutive quarters of declining economic activity, as measured by gross national product. Many times recessions are actually over and the economy has resumed growing before economists can declare that a recession has occurred, based on lagging economic data.

There will be future recessions, but they are not directly correlated with ups and downs in the stock market. Stock markets are more correlated to corporate earnings and future earnings expectations.

“When will the next stock market crash occur?”

We don’t know. And neither do others, reliably and consistently.

As we have a disciplined investment philosophy and we adhere to your personal investment policy (plan), as markets increase, we would be gradually selling stocks and increasing your fixed income base.

We would not allow your stock allocation to grow from a 50% target (for example) to 60% or 70% of your total portfolio. We would be re-balancing back to 50% as your portfolio grew, due to market increases.

Not re-balancing and allowing the stock allocation to grow and grow was a key mistake that many investors made in the years before the tech bubble of 2000, and at other times. I witnessed this many times as a CPA in the late 1990s and this was one of the factors that heavily influenced us to start this firm. This was a preventable mistake.

While we can’t predict a future crash, we do have the ability to evaluate how much risk you need to take to reach your financial goals. If you don’t need to take as much near term stock market risk and still have adequate resources, then we would reduce your stock market allocation. Then, when the next crash or significant decline occurs, you will not be impacted as much.

While we don’t have all the answers you may want to hear, we have strategies and knowledge that are helpful for you to hear and follow for a secure financial future.

 

 

 

*In US dollars.
Represents cumulative total returns of a balanced strategy invested on the first day of the following calendar month of the event noted. Balanced Strategy:12% S&P 500 Index,12% Dimensional US Large Cap Value Index, 6% Dow Jones US Select REIT Index, 6% Dimensional International Value Index, 6% Dimensional US Small Cap Index, 6% Dimensional US Small Cap Value Index, 3% Dimensional International Small Cap Index, 3% Dimensional International Small Cap Value Index, 2.4% Dimensional Emerging Markets Small Index, 1.8% Dimensional Emerging Markets Value Index, 1.8% Dimensional Emerging Markets Index, 10% Bloomberg Barclays Treasury Bond Index 1-5 Years, 10% FTSE World Government Bond Index 1-5 Years (hedged), 10% FTSE World Government Bond Index 1-3 Years (hedged), 10% ICE BofAML 1-Year US Treasury Note Index. Assumes monthly rebalancing. For illustrative purposes only. S&P and Dow Jones data copyright 2018 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. ICE BofAML index data copyright 2018 ICE Data Indices, LLC. FTSE fixed income indices © 2018 FTSE Fixed Income LLC. All rights reserved. Bloomberg Barclays data provided by Bloomberg. Dimensional indices use CRSP and Compustat data.

Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice. Returns of model portfolios are based on back-tested model allocation mixes designed with the benefit of hindsight and do not represent actual investment performance. See “Balanced Strategy Disclosure and Index Descriptions” pages in the Appendix for additional information.

 

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