Advisor Perspectives

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Will You Be Prepared When the Market Cools Off?

by | Sep 13, 2017 | Article

Markets have cycles, and at some point, the major indices will descend.

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We have seen a tremendous rally on Wall Street, nearly 11 months long, with the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average repeatedly settling at all-time highs. Investors are delighted by what they have witnessed, but now is not the time to become complacent. That leads me to ask the question, what are your next steps to prepare for a market correction?

The major indices do not always rise. Unfortunately, that obvious fact can easily become “back of mind” these days. On September 8, the Nasdaq Composite was up 20.93% year-over-year and 18.15% in the year to date. The DJIA was up 17.95% year-over-year and 10.30% since the beginning of 2017. Performance like that can breed overconfidence in equities.

These major indicies last corrected at the beginning of 2016, and a market drop may seem like a remote possibility now. Then again, corrections usually arrive without much warning. You may want to ask yourself: “Am I prepared for one?”

Are you mentally prepared? Corrections have been rare in recent years. There have only been four corrections in this 8-year bull market. So, it is easy to forget how frequently they have occurred across Wall Street’s long history (they have normally happened about once a year).

The next correction may shock investors who have been lulled into a false sense of security. You need not be among them. It will not be the end of the world or the markets. A correction, in a sense, is a reality check. It presents some good buying opportunities, and helps tame irrational exuberance. You could argue that corrections make the market healthier. In big-picture terms, the typical correction is brief. On average, the markets take 3-4 months to recover from a fall of at least 10%.

Are you financially prepared? I’m blessed to work with hard-working individuals and families on a daily basis to help them achieve their financial goals. However, through my discovery sessions, prospective clients often come to me with portfolios that lack proper allocation or protection. Most have large asset allocations in mutual funds through their 401Ks and IRAs that are set up to take a hard hit when the indices correct.

It’s possible for you to stand apart from the ranks by checking with a financial advisor to establish a portfolio that works as efficiently as possible while protecting you from downside risk. Thanks to the recent rally, many investors have seen their equity positions grow larger, perhaps too large in terms of their percentage of assets at risk. If you are one of them (and you may be), this might be the perfect opportunity to seek professional guidance to make sure your risk exposure is properly managed.

A correction will happen – maybe not tomorrow, but at some point a retreat will take place. The good news is great investment options exist that provide the wealth accumulation, tax minimization and asset protection that can be used to design a financial plan around your needs. Get ahead of it now so you can sleep at night knowing you’re properly protected.