As certain as death and taxes, the economic reality is that bull markets don’t last forever. Whether it’s due to lower GDP growth, war, trade tariffs or a slew of other factors, tough times will eventually knock on our doors. A recession ensues, companies lay-off employees and the general mood of the population sours.
Although we as individuals cannot control the health of the overall economy, what we can control is our reaction to economic instability. As we face another bear market, I started to think about Ron Blue’s 5 economic realities from his book “Surviving Financial Meltdown.” These facts are some of the most common worries that investors fear during tough times, so I’ve expanded on these and come up with a plan of action that, hopefully, will not only give you peace of mind, but will also keep your investments growing strong.
1. Economies and Stock Markets Go Up and Down
DO plan for, and expect, downturns.
First and foremost, we must understand that economies and stock markets are volatile. Although they should generally trend upward, they hit a huge bump in the road every few years. The dot-com bubble in the late ’90s and the financial crisis of 2008 are just the two latest examples. They weren’t the first, and they certainly won’t be the last.
DON’T sell low and buy high on emotions.
When (not if) those bumps hit, we invariably feel it in our wallets and see it in our investment portfolio statements. If you’re not mentally prepared, you will be tempted to sell your investments when you see these declines. The opposite is also true. When times are good, and the stock market is on a tear, you’ll be tempted to buy high. Don’t let your emotions dictate your actions to buy or sell at the least opportune time. Instead, think from the other point of view. Perhaps stock market declines are good times to add to your investment portfolio.
2. The Only Certainty is Uncertainty
DO expect change and look for opportunities it brings.
The old saying, “In life, the only constant is change,” stands true to this day. Expect and embrace change. You will find new opportunities through change, and when you avoid it, you get left behind. The founder of Netflix started the company because he got tired of paying late fees on VHS movie rentals. He saw an opportunity to revolutionize the industry by renting DVDs in the mail without charging late fees. But Blockbuster stood still, did not embrace the fact that its business model had become stale and ended up going out of business. And today, even though Netflix is now one of the biggest companies in the world, it is still evolving and embracing change, going from mailing DVDs, to streaming, to now producing original content.
DON’T worry, avoid risk because of fear or attempt to control events.
Chance happens. As much as we want to control everything that happens to us in life, we can’t. It is simply impossible. So don’t worry about things that you can’t control, and don’t avoid taking risks because of fear. But know that taking risk doesn’t mean you should drive your car without wearing a seat belt. There’s a difference between taking a calculated investment risk and a downright stupid risk.
3. Conventional Wisdom is Usually Wrong
DO seek wisdom from God.
Conventional wisdom is often nothing more than conventional thinking. As humans, we are all biased toward our own experiences. When you pray and study Scripture, you’ll hear God’s voice guiding you in the right direction. Put your trust in God and seek Godly counsel from others who share your same belief in Him.
DON’T look for “insider secret” shortcuts to success.
We are all human, which means we are susceptible to being fooled by the get-rich-quick schemes. We often look for shortcuts to success that don’t exist. The truth is that if shortcuts did exist, no one would fail. So if someone offers you any “insider secrets,” proceed with caution. Instead, look for knowledgeable friends and professionals who have succeeded without taking shortcuts and learn from them. I also recommend talking with a fiduciary financial advisor who understands the financial services industry, is obligated to work in your best interest and can help calm you down from some of these most common worries.
4. No One Investment Works Every Single Time
DO diversify your investments.
Back in 2001, when Enron was one of the biggest names on Wall Street, many of its employees put all of their retirement savings in Enron stock. The employees believed in the company and thought its stock would keep going up, but ended up getting completely wiped out when Enron declared for bankruptcy. Learn the Enron lesson and spread out your investment portfolio risk. You’ll sleep better at night knowing that all of your eggs are not in one basket.
DON’T stop investing.
Putting all of your eggs in Enron stock would have been a bad idea, but it shouldn’t prevent you from investing. The S&P 500 has returned an average of 10 percent per year since its inception in 1928. Of course, some years are better, and other years are a lot worse. Working with a fiduciary financial advisor is a great strategy if you tend to be an emotional investor.
5. Correct Principles Work Correctly Throughout Time
DO remain calm.
When financial storms hit, the first thing you should do is remain calm. Know that if you follow the right investment principals outlined above, you will get through each and every storm.
DON’T fear.
Don’t let your fear or lack of confidence prevent you from sticking to a solid financial plan. Warren Buffett said it best: “Be fearful when others are greedy, and be greedy when others are fearful.” When the stock market collapsed in 2008, he took the opportunity to buy instead of being fearful, and he was rewarded handsomely for his actions. We could all learn a thing or two from him.
Summary
We need to accept the fact that downturns are part of the economic cycle. No matter how great the economy seems to be at one point in time, it can spiral downward at any given moment. Prepare for downturns by living below your means, saving more than you spend, getting out of debt and having an emergency fund of up to six months worth of living expenses.
Only when we proactively face the economic realities and prepare ourselves for the tough times ahead will we be able to ride through them and come out on the other side unscathed.
If you find yourself fretting over some of these most common worries, contact us. Global View has worked with investors just like you. Give us a test drive. It’s free.
