By Jeffrey S. Williams, Grand Wealth Management
In his most recent Berkshire Hathaway shareholder letter, Warren Buffett shared this powerful insight about market downturns:
“During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy.”
This is a good time to talk about scary markets, since we haven’t experienced a severe one in a while.
Scanning financial news in our calm market, you’ll find the usual range of attempted interpretation about our current market: “We are worried about …” “Economic indicators suggest that …” “Geopolitical events are likely to …” and so on.
While it’s highly unlikely the market will remain this calm forever, nobody can predict when it might turn, or why or how dramatically it may spike back up when it does. We counsel against shifting your portfolio in reaction to near-term forecasts. Instead, let’s use the relative calm as a perfect time to do a reality check on what scary markets really represent, and how to manage them when they occur.
Contrary to common perception, scary markets can be your friend. Instead of fussing over when the next market downturn may or may not occur, here are some great questions to consider:
- Are you taking on enough stock market risk in your portfolio to capture a measure of expected returns when they occur?
- Are you fortifying your exposure to market risks and expected returns with enough lower-risk holdings, so you won’t fall prey to your fears the next time markets tumble?
- Have you assessed whether your current portfolio mix is optimized to achieve your personal goals and have those goals changed?
- Does your current portfolio mix of safer/riskier holdings accurately reflect what you’ve learned from past markets?
- Have you carefully considered what a 30% or so market downturn would mean to you in real dollars and cents?
You can prepare for the next down market by having a well-planned portfolio in place today — one you can stick with through thick and thin. Neither too “hot” nor too “cold”, your portfolio should be just right for you. It should reflect your financial goals. It should be structured to capture an appropriate measure of expected returns during good times, and allow you to effectively manage your personal fears throughout.
