The Roller-Coaster, your nest-egg and the effect on your life plans
As I write this October 18th, 2017, the Dow Jones Industrials has broken through 23,000; another upside record, halleluiah! Now what?
The doodle immediately above is a loose, very loose, representation of the cyclic nature of stocks – they go up and down.
At peaks, investors experience optimism and exuberance, usually followed by additional investments in stocks. The opposite is true at stock market bottoms; pessimism rules the day, panic creeps in, many sell their stock positions. Most investor mistakes, in our opinion, are made at the height of emotion which as you may have experienced is coincidental with market tops and bottoms.
The reason we undertake planning for our clients is to attenuate the emotional impact of rollercoaster markets. By focusing on the probability of success we believe clients can focus on what’s essential “Am I ok?” and two, “what does it mean if my plan has moved from my target probability of 85% to 80%?”
So, let’s say markets are down substantially and the probability of the plan has dropped to 80% from 85%, what does that mean? Does it mean that there is a 20% probability the plan fails, and I will run out of money in retirement? Most of the time if a plan probability drops a bit, it does not indicate a complete failure, but it may require the client to delay their vacation for a year or delay the car purchase for a few months, in extreme cases, it may require the client to forgo an income raise for a year. Nothing drastic. In our opinion, all these alternatives are a whole lot better than a panic selling spree at a market bottom: recovering from that is almost always impossible.
So, are we at a market top? Yes. Are we likely to go into a severe Bear Market? If I knew that, I’d be on my 350’ yacht of off Monaco enjoying a toddy.
I came across some sage advice this morning in a Raymond James publication by Jeffrey D. Saut, RJ’s Chief Investment Strategist *.
Thinking … reminded us of Peter Lynch’s four stage “Cocktail Theory” as scribed in his book One Up on Wall Street. To wit (as paraphrased):
- Stage 1: At the party, the market has been down a while and people are not talking about stocks. There’s little interest in talking to an equity mutual fund manager like Lynch about it. When folks generally seem inclined to talk about plaque with a dentist rather than about stocks, it’s likely the market is about to head higher.
- Stage 2: People may talk about stocks long enough to say they’re risky but would still rather not talk about them. Party conversations are still more plaque than stocks, and the market’s up roughly 15%. Few care.
- Stage 3: The market is up 30%, people start asking a professional money manager like Lynch what stocks to buy. Most have now bought a stock or two.
- Stage 4: People are crowded around Lynch, but now they are telling Lynch what stocks to buy. Dentists are now offering stock tips. This is a good sign the market is near a top.
I do not know precisely at what stage we are in, one. And, Two; I haven’t received a stock tip from a dentist. So, setting new market highs will most likely continue, for now.
It’s easier to plan for your future than to ride the rollercoaster. Our Family Wealth Planning Process is the first step in attaining the freedom you desire in your retirement.
Take a look: https://www.dominguezandjones.com/wealth-management/
Currently, our portfolios overweighted domestic and foreign equities.
Carlos Dominguez – Portfolio Manager, RJ
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