Guerin Blog

DON’T MISS GEORGE’S WEEKLY BLOG FOR THOUGHTS ON THE ECONOMY, THE MARKET, AND GLOBAL EVENTS—AND HOW CURRENT EVENTS MAY IMPACT YOUR PERSONAL FINANCES.

Remember to breathe...

Remember to breathe...

I’ve been practicing yoga for over 10 years. It’s amazing how many times in a typical yoga class the instructor reminds us to breathe because when we get stressed, we either forget to breathe or we go into shallow breathing. The problem is this: humans aren’t able to automatically discern when we’re being threatened. Shallow breathing is an automatic, physical response to any type of stress (including a challenging yoga pose). By learning to alter our breathing, we’re able to find that place of calm than can de-stress even the most difficult situations. That’s why I practice yoga. By the end of class, the shavasana, makes me feel refreshed and replenished for the rest of the day. It doesn’t change the circumstances, but it helps me stay calm, focused, and on track.

Most of us could benefit from some calm-breathing techniques at the moment. 2016 hasn’t started out on a very good foot—at least from the perspective of the stock market. On Monday, the Dow closed down 276 points, largely in reaction to a 7% drop in China’s market. This, on top of 2015’s flat market, has some investors wondering if their investments will recover this year—especially seniors who inevitably have less time to recover from a market downturn. That’s what prompted this email from Daniel, a 75-year-old client I’ve been working with for decades:

George,

Over the years, we’ve always focused on the long term. I get it. But at my age, “long term” is relative. Can we talk about how much the bear market impacts my portfolio and my retirement income? I trust you have the answer. I just need to hear it from the horse’s mouth so I can feel more secure moving forward.

Daniel isn’t alone. Seniors count on a certain level of return to provide monthly income, which is why a flat or down market can feel pretty scary. To keep the fear at bay, here are my suggestions, straight from the horse’s mouth!

1.     Expect the market to overreact. To keep things in balance, the market often overreacts to factors such as interest rates, global unrest (both war and economics), and the state of the US economy. But, like any pendulum, it swings back, usually at an equal rate. A huge market dip on Monday is often followed by significant gains in a day or two. Plus, even extreme swings are temporary. Yes, it’s easier to have that perspective when you have years left to recover, but regardless, chances are good that things will balance out sooner rather than later.

2.     Decide what you can live with. How you react to market swings is highly personal. “Risk tolerance” is as much about numbers (current age, life expectancy, portfolio size, etc.) as it is about your own personality. In 2015, regardless of your age or assets, it seemed there was no place to hide. The Dow aand the S&P were down. The third quarter was dismal, including a bond market correction that wiped out “safe haven” gains. In this environment, deciding you can live with volatility is key. Sure, you can pull out of the market and opt for 1% return (after your market losses), but that’s rarely wise (just ask anyone who pulled investments out of the market in 2008). If you can stomach the new-normal of constant volatility, you’ll likely be better off 12 months from now.
3.     Don’t worry too much about China. Or the Middle East. When China’s market declined 43% last summer and the US market responded, some investors panicked and pulled their money—only to watch the markets climb back up almost immediately. (For more on the China situation, see my August 26 blog. Nothing has changed.) Yes, China’s economy may be impacting the world markets, but only in the short term. The same is true whenever happenings in the Middle East—oil prices, violence, and political unrest—throw investors sideways, but things typically return to business as usual once the dust settles.
4.     The Fed is built to make rational decisions. The US Federal Reserve raised interest rates in December, which was an indicator of the growing economic strength of the US. (See last week’s blog for more on the economy.) The fact is that Janet Yellen isn’t the lone decision maker when it comes to raising rates. The process includes lots of number crunching, debate, and proven rationale. As a result, the Fed hasn’t been wrong about when to raise rates. Ever. Having their fingers pointing toward a growing economy bodes well for stocks in 2016.

5.     Control what you can. If last year’s flat market has left you with a less-than-optimal outlook on your retirement income, now may be the time to crank up your investment in stocks. Sound crazy? It’s actually an ideal way to leverage the situation and increase your growth potential. With stocks currently “on sale,” adding more to your portfolio now could potentially result in a 6, 7, or even 8% return in the coming year—which is a great way to help your portfolio catch up after last year’s lackluster performance. I believe stocks will be tomorrow’s bright spot.

Ultimately, I trust the market. I trust the wisdom of diversification and using managed portfolios that take a close look at the ever-changing factors that impact the prices of stocks and bonds and then identify hidden opportunities for delivering an optimal return balanced with risk. It’s a rare case when pulling assets out of the market makes sense. Keep emotion out of your investment decisions as much as possible and breathe, two more breaths, breathe… Namaste.

 

Finding it a challenge to keep calm? Let’s schedule a time to take a closer look at your portfolio, your time horizon, and what we can do to keep your finances on track.

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