The Dow Jones Industrial Average is down more than 1,200 points since its intraday peak on April 26th, and an appropriate question is whether you're taking it in stride or if the temptation to push the panic button is creeping into your mind. When the market sinks more than 10%, Wall Street calls it a 'correction', and now we officially have one. While the causes of this recent decline vary based on whom you ask, we find the entire discussion irrelevant. Here's why:
Oracles, Seers, and Fortune Tellers
The fact remains that no one can accurately predict the movements of the market. As we have explained previously, until you can explain the decisions of the billions of global market participants, you simply cannot know what will happen in the future. Thus, oracles, seers, and fortune tellers that go by the titles of Chief Investment Strategist, Lead Economist, Hedge Fund Manager, and the like are no better able to assess what's coming next.
If the Future is Uncertain...
Accepting this fact, it is pretty simple to know what to do, and the answer isn't 'do nothing'. Whenever the stock market takes a tumble, it is a good time to assess where you are with your portfolio, and what we mean by this is to consider not just how your assets are allocated, but where you are with your job, insurance coverages, emergency fund, and so on. The reason for this is your investments - even long term investments for retirement - don't live inside of a vacuum. They are an important part of your overall financial health.
Wide Lens Investment Management
To better weather a storm in the stock market, you need to review and ensure that you are covering all of your bases with particular attention paid to job security, insurance coverages, emergency reserves, and your ability to tolerate risk. This is what we like to call 'Wide Lens Investment Management' because instead of taking the narrow view and only examining an investment portfolio, this method incorporates other important factors that can affect your investments.
T. Rowe Price has the slogan of 'Invest with Confidence'. We like to think that confidence is a byproduct of knowing you have a secure job, appropriate insurance, and sufficient cash for an emergency because you can be as confident in your portfolio as you'd like, but that won't help if you're exposed in other areas of your finances. It's nice to have a well put together portfolio, but many other issues must be addressed first.
How We Do It
On our site, we help you put together an asset allocation model, just like many other investment sites, but we do it with a wide lens. We require you to complete an emergency fund plan first so we can better understand your cash position and ability to handle a job loss or short-term disability. Once that is complete, you can then put together a retirement investment plan that will provide you with an asset allocation model.
Again, we use a wide lens because we don't just take into account your time horizon and risk tolerance, but we also assess your ability to withstand a major financial emergency and put that in view with the market's current valuation relative to long-term averages. If you're light on your emergency fund, we'll suggest you hold cash in your retirement portfolio to cover the difference. When the market looks expensive (as it has for some time now), we dial down exposure to stocks.
The goal of our software is to deliver an asset allocation that is appropriate in light of your entire financial picture and to help smooth out some of the bumps along the way. We don't worry about returns because returns are a function of your risk tolerance (never the other way around). If you can 'Invest with Confidence', we're betting that your returns will be more than sufficient and you won't have quite the stomach ache when times are tough - like today.