Making Financial Sense: Protect Yourself at All Times
byJames C. Knapp, AIF®
Settling into 2018, we will soon be celebrating Earth Day. According to History.com, Earth Day is an annual event celebrated on April 22 where various events worldwide are held to demonstrate support for environmental protection.
Keeping Earth Day in mind, you might personally reflect about tangible ways to protect the environment. As noble as your intentions are, you may become absorbed by the responsibilities of day-to-day life and before you know it, making your planned impact on the environment has been pushed to the bottom of the to-do list.
In my experience, this is strikingly similar to the way that many investors forget to focus on strategies that aim to protect their investment portfolio(s). We are all well aware that neglecting our planet can have significant and even catastrophic consequences. The same can be said for our investments and financial independence.
This is especially significant as:
· The richest women in America live 10 years longer than the poorest women ( https://healthinequality.org/)
· The richer you are, the longer you live. The consensus seems to be that the wealthy people (of both genders) on average live more than seven years longer than the poor (https://www.washingtonpost.com/news/wonk/wp/2015/09/18/the-government-is-spending-more-to-help-rich-seniors-than-poor-ones/?utm_term=.03b741213d7a)
· Women report being happier than men and happier people tend to live longer, enjoying better long term health and wealth outcomes (https://www.brookings.edu/blog/up-front/2016/03/04/some-good-news-for-international-womens-day-women-are-usually-happier-than-men/)
Rewarding investment markets with impressive returns over a period of time can lead to average investors being caught off guard and ill prepared for an unexpected market decline. Inherently human beings are more comfortable thinking that things will never change. An important thing to keep in mind is that investment markets are cyclical. History states that many financial trends will likely not continue infinitely.
As an example, over the last six months of the bull market that ended in March 2000, the Nasdaq Composite Index doubled in value. Not surprisingly, many investors gave way to the enthusiasm and euphoria. We all are aware of what happened next….
· In 2000, the Nasdaq Index lost 39.29%
· In 2001, the Nasdaq Index lost 21.05%
· In 2002, the Nasdaq Index lost 31.53%.
There will be many sound and well-researched arguments for both bullish and bearish opinions. I believe investors should be centered on a strategy that aims to reduce losses in a bear market. Investing takes willpower and diligently following your process even if it contradicts conventionally held wisdom. Warren Buffett, CEO of Berkshire Hathaway and one of the world’s most respected investors, said “be fearful when others are greedy and greedy when others are fearful.”
I suggest all investors should look under the hood to avoid simply accepting the prevailing headline story. A current example is the general consensus that the overall economy is on solid footing and though not growing robustly, it is consistent. For balance, a few points to keep in mind are:
· The 4 largest U.S. retail banks suffered $12.5 Billion in defaulted credit cards in 2017, up from $10.5 Billion in 2016 (source: Mercator Advisory Group)
· Total outstanding credit card debt of Americans reached $1.023 Trillion in November 2017, a record high, exceeding the previous record high of $1.021 Trillion from April 2008 (Source: United States Federal Reserve)
· In the 3rd quarter 2017, the Federal Housing Administration delinquencies spiked to 9.4% from 7.94%, the highest quarterly increases in the survey’s history. Delinquencies rose in states not impacted by natural disasters (The Mortgage Bankers Association)
I am not suggesting the sky is falling or the economy is going into a tailspin. Rather, I am merely stating that investors have locked in an investment scenario which does not account for the unexpected (i.e. economic, political risks, etc.) which can unravel any solid investment plan.
Before a boxing match begins, the referee states “protect yourself at all times.” I suggest you should consider this statement for your investment portfolio. Before you invest, determine the process for how you will react should things go awry. I have seen it all too often that when markets experience downturns, an investor’s emotional reaction can lead to poor decision making. While this may make you feel comfortable in the short run, it rarely is the most effective way to drive financial independence.
There are many strategies you can utilize that aim to protect your investment portfolio. As you read this, think about whether or not you have a pre-determined investment process of how to invest given various scenarios? If you do not have an investment process, I suggest you develop one soon. The Knapp Advisory Group can help you develop and refine relevant investment strategies that align with your financial goals.
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC
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 into directly.
The NASDAQ Composite is a stock market index of the common stocks and similar securities (e.g. ADRs, tracking stocks, limited partnership interests) listed on the NASDAQ stock market. Along with the Dow Jones Average and S&P 500 it is one of the three most-followed indices in US stock markets. The composition of the NASDAQ Composite is heavily weighted towards information technology companies.