While the coronavirus is still very much a part of our lives today, I think enough time has passed to reflect on what I’ve learned thus far. Here are some observations including five lessons that I think we can all reflect on as we embark upon the days, months, and years ahead.
The 2nd longest bull market (uptrend) in history came to an end in March. After 11 years, anyone with a 401k, IRA, or any type of investment account became accustomed to a stock market that would lose anywhere between -12 – 19% at worst (and do so over the course of 3-4 months), only to come right back a short 3-6 months later. Still today, I believe that most investors are spoiled on the unbelievable momentum of the 2009 – 2020 bull market.
Here’s another unique thought: Since the average person starts contributing to a 401k between 25-30 years of age, and since most couldn’t care less about the balance until it starts gaining some value, you would have to be at least 40 years of age today, in order to have experienced a real stock market crash. Otherwise, for anyone under 40 years of age, the worst stock market drops they’ve experienced were in that shallow, correction range mentioned above.
So are today’s investors open-minded, realistic, and prepared for something that might last a lot longer? It doesn’t seem that way to me.
When the stock market goes up for 11 years without a significant drop in value, investors have a tendency to progressively push the envelope further with regard to the risk they’re willing to take – and with every mild correction that happened in the 2010’s, investors became a little more risky, even though it wasn’t part of their natural predisposition.
For example, as we’ve been bringing new clients on-board this past couple months, people who should have been invested in “Conservative” portfolios are instead invested in “Balanced” allocations. People who are in “Balanced” allocations were mis-allocated in “Moderate Growth” models (and so on). What’s interesting, but not surprising, is that this same psychological phenomenon took place prior to and during the dot-com bubble in 2000, and it’s happening again.
Charles Schwab did a study and found that only 1-in-4 people have an official, written financial plan, and CNBC recently reported that 75% of people are “winging it” when it comes to their financial future. When you’re not certain whether you can retire when you want, take the vacations you’ve always dreamed of, and do so, all without ever running out of money in retirement, how in the world are you supposed to know how to invest your money?!
Imagine driving from Boston, Mass to San Diego, California for the first time ever, but making the trip without a Map or GPS. Unless you are incredibly wealthy, having a customized financial plan or “Financial GPS” is crucial to your success leading up to, and throughout retirement. Not only do you need a road map to get there, but you need to be prepared for any metaphorical road closures, traffic, and bad weather.
The most recent Dalbar study reported that, while the S&P500 averaged 5.6%/year, the average investor earned only 1.9%/year over the same stretch of time. This is primarily due to the unintended consequences of Lessons #1 and #2 above.
Once you have a plan in place, you need to review it, at least annually, and then stick to the plan. Any plan, if not followed, is completely worthless, but if you’re taking too much risk in your retirement portfolio (Lesson #2 above), then you’re likely to abandon ship when a stock market crash arrives.
The corrections that took place in 2010 (-16%), 2011 (-19.4%), 2015 (-12.4%), 2016 (-13.3%), and 2018 (-10.2%) and (-19.8%) were just that… mere “corrections.” Stock market crashes are a different animal, altogether. The average crash is roughly (-42%) and lasts around 16-18 months. The market fell (-47%) for 24 months, between 2000-02 and it fell (-58%) for 18 months, between 2007-09.
I get the feeling from those I talk to on the phone each week, or messages I receive on Twitter, that many people feel this could end up being the fastest recovery in U.S. history. While anything is possible, I’m not rolling out my sleeping bag in that camp. I feel that a lot of work needs to be done in order to repair the damage that’s been done.
So in closing, re-evaluate your risk, determine whether you’re in the correct portfolio allocation models, review your plan if you have one – and if you don’t, be sure to hire a professional to get a written Financial Plan constructed ASAP… and then stick to it and review it annually, at minimum. You can’t get to and through retirement if you don’t know how to get there!
Adam Koos, CFP®, CMT® is a CERTIFIED FINANCIAL PLANNERTM, one of only 2,600+ Chartered Market Technicians (CMT) worldwide, as well as a Certified Financial Technician (CFTe®) thru the International Federation of Technical Analysts (IFTA). He’s been named by Columbus Business First as one of their 20 People to Know in Finance, is a recipient of the Forty Under 40 award, is ranked by Investopedia as one of the Top-100 Most Influential Financial Advisers in the U.S., and is the winner of the coveted Better Business Bureau Torch Award for Ethics and Trust. Adam serves his clients as the president and portfolio manager at Libertas Wealth Management Group, Inc., a Fee-Only Registered Investment Advisory (RIA) firm, located in Columbus, Ohio.Categories: Adam Koos, CFP®, CMT®, Educational Articles, Market Commentary