Well, folks, we made it to the last installment of a difficult topic - recession-proofing your finances. This week we will wrap our discussion up with a chat on being honest about the effects emotions have on your investments and keeping your credit score high. I do have to warn you, though, I may sound a bit like a broken record from the last installment to this one BUT let’s dive right in any way.
Leave Your Emotions At The Door
Yes, investing gurus say that people in certain age brackets should have their portfolios allocated a certain way, but if you can’t sleep at night when your investments are down 15% for the year and the year isn’t even over, then you may need to check your emotions, not your asset allocation. Investments are supposed to provide you with a sense of financial security, not a sense of panic.
But wait—don’t sell anything while the market is down, or you’ll set those paper losses in stone. When market conditions improve is the best time to trade in some of your stocks for bonds or trade in some of your risky small-cap stocks for less volatile blue-chip stocks. Of course, I highly discourage you from doing this without the guidance of an advisor - that would be like having your auto mechanic perform your root canal; we can all imagine what those results would be like. Trust me; you don’t want your portfolio to look like that!
So how do you avoid all that? Rebalancing. Rebalancing, which is the job of your professional advisor, is the best way to eliminate the issues caused by emotions. Does everyone get heartburn when markets are volatile? Yes! Does everyone sell and run? No!
Why? Because long-term investors know that time in the market is how to make the most of your investments over the long haul, not timing the market. Here is where I typically say something about the crystal ball none of us have and how even the folks who proclaim to be experts blabbing away on the media about the next crash, recession, depression, market high, and the like have no more clue about the future than you or I. There, I said it without saying it!
Here’s a very small example just to illustrate what I’m "not" saying. If you don’t have all of your money in one place, your paper losses should be mitigated, making it less difficult emotionally to ride out the dips in the market. If you own a home and have a savings account, you already have a start: You have some money in real estate and some money in cash.
Diversifying is critical to long-term investing, as is asset allocation. A quick definition, so I am not harping too much, diversification means you build a portfolio of investment pairs that aren’t strongly correlated, meaning that when one is up, the other is down, and vice versa (like stocks and bonds). This also means that you should consider asset classes and stocks in businesses that are unrelated to your primary occupation or income stream. OK, done; I know you probably didn’t need me to define that, especially if you are a client, but in the interest of being thorough…
The third part of that equation is rebalancing. This is where we realign your portfolio as necessary to ensure your investments still match your asset allocation and diversification goals. When the markets move a lot, portfolio percentages can get "out of whack." I know that is a highly technical term, but what it means is that over time, asset allocations can change as market performance alters the values of the assets. Rebalancing involves periodically buying or selling the assets in a portfolio to regain and maintain that original, desired asset allocation.
Here's an example. Take a portfolio with an original target asset allocation of 50% stocks and 50% bonds. If the stocks' prices rose during a certain period of time, their higher value could increase the allocation proportion within the portfolio to, say, 70%. The investor may then decide to sell some stocks and buy bonds to realign the percentages back to the original target allocation of 50%-50%.
Pretty simple, right? And what's even better is that your advisor will do this for you and discuss it with you in your annual review so you don't even have to think about it. Should your goals change, you'll change those allocations and diversify and rebalance accordingly.
Keep Your Credit Score High
OK, and now to our last tip of the month. When credit markets tighten, as they are now, thanks to all those interest rate hikes the Fed is doing to fight inflation, if you are going to get approved for a mortgage, a credit card, or another type of loan, it’s more important than ever to have excellent credit. Things like paying your bills on time, keeping your oldest credit cards open, and keeping your ratio of debt to available credit low will help keep your credit score high.
When times are tough, maintain communications with your creditors to keep them happy by making arrangements to keep your accounts in good standing. Many lenders and businesses would rather see you continue to be a customer than have to write off your account as bad debt.
Ok, as Bug Bunny says, “That’s All, Folks!” But I will leave you with this, making intentional, thoughtful, and wise decisions about your finances are always important. However, it is even more important in times like these. So, keep on practicing those investing principles of faith, patience, and discipline and those all-important practices of asset allocation, diversification, and rebalancing.
Until next time…
One last thought, I believe an educated investor is an empowered investor. If you like what you’ve read and think your friends and family can benefit as well, please share.
1 Investopedia. 7 Ways to Recession-Proof Your Life.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly.
All investing involves risk, including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Dollar-cost averaging involves continuous investment in securities regardless of fluctuation in the price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.