“Our imagination is the most important faculty we possess. It can be our greatest resource or our most formidable adversary. It is through our imagination that we discern possibilities and options. Yet imagination is no mere blank slate on which we simply inscribe our will. Rather, imagination is the deepest voice of the soul and can be heard clearly only through cultivation and careful attention”- Pat Allen (source: notable-quotes.com). Our brains are constantly being fed information about the stock market every day. The end is coming. The run will continue. Get in. Get out. For most of us, this noise can be information overload and send our brains into a virtual state of shock. With markets hitting all-time highs this year, many people have become concerned that we will see a repeat of dot-com bubble crash in 2000 and the recent 2008 market crash. So if you are worried about a 3rd Armageddon in the past 15 years, what smart money moves should you be making with your money?
The first thing I have shared again and again in my columns is that you want to lighten your backpack and pay down debt. Debt is the ball and chain attached to your feet that prevents you from not only being financially stable buy emotionally happy about your money. Very few people can stand the emotional ups and downs of building their wealth through leverage. It’s obvious that debt which carries a high interest rate such as credit cards are really smart to pay down and get off your family balance sheet. The more challenging option is whether to pay off low interest rate items such as an auto loan that may be at 2.9% or a home mortgage that is at 4%. While you can convince yourself that you can you do better in the market with your money, if you are worried about losing your money to another stock market crash then paying down (or paying off) the mortgage can be a very safe bet. It’s true that this may remove some liquidity of your cash if it is stuck in your house, but what safer bet do you have?
The second item you should be sure of is that you have stored up an excellent cash reserve. In the business world, money always chases something. It hardly ever sits idle for long. When the markets start to do well and people are bragging about their Superman like returns on last year’s portfolio, it makes many of us wonder why we aren’t in the game. These emotions start to make the average investor use margin in their brokerage accounts, borrow home equity on their house, and take all of their cash out of the bank chasing a greater return on their money. This is the beginning of the end. Remember, that those of you who earn a six figure income can put a severe hole in your financial plan if you lose your job or have a cut in your income, so make sure you maintain at least six months cash reserve. For those that are most conservative, you may want to have a year of cash reserve store up at the bank.
The third component is to closely look at the funds where your children’s college education money is allocated to at this time. Some people have their resources allocated into an age based investment model which automatically reduces the risk every year your child gets closer to college age. Clients in this type of model will have less risk to worry about with a stock market crash. The people who should be much more concerned are those with 100% of their funds invested in the stock market and your child is getting ready to college this fall or next fall. Remember, as a general rule of thumb, that the amount of risk you take with your investment should shrink the closer you get to the goal. Many parents were stung in 2000 and 2008 by simply not pulling back the risk with funds invested for their kids’ college education funds.
The fourth thing is to examine the overall allocation in your 401(k). It’s important to note that some 401(k)’s have tools today that will alert you if your asset allocation goes out of whack within a particular asset category. This will only happen if you go into the 401(k) system and put in the alerts. Remember, that you should do a thorough analysis to figure out what rate of return you need in the long term from your 401(k) to retire comfortably, and then make sure you have the right mix of asset classes to maximize your risk/reward structure. Many new clients I come across will have 100% of their 401(k) in stock or equity type mutual funds which can be incredibly dangerous. If you saw your 401(k) get cut in half five years ago and now come back to the level it was at five years ago, what steps will you take today to reduce some of the risk so it won’t happen again? Some 401(k)’s will allow for an in-kind or in-service distribution and allow you to roll a portion of the 401(k) into your own IRA which may give you more options than your current 401(k).
The fifth consideration is to ask yourself if you have set up something that is fixed and guaranteed to pay you paycheck in retirement. Remember, I have shared in the Your Smart Money Moves column that some of the happiest clients I know are those who get a pension in retirement. These clients tend to think more about enjoying their retirement and much less about what is happening with the stock market. If the entire portfolio is tied to the stock market through stock, exchange traded fund, or mutual fund type investments, is it time to sit back down with your financial advisor and think about what percentage allocation belongs in pension driven type investments? Remember, that the older your get the less time you have to recover from significant downturns in the market.
One last idea I’ll share is considering other asset classes that are not in the stock market. A great example is that many people still do not realize you can use your IRA (if set up appropriately) to buy real estate. Perhaps this is the time to look at that vacation or retirement home for the future. There are other asset classes that are not stock market driven, but you will still need to consider the risk by getting into those investments and more importantly the TIME FRAME necessary to hold those investments. Just look at what happened to people who bought gold bars 18 months ago thinking they were going to make a quick profit.
You’ll read all types of articles in the upcoming weeks around the stock market as it makes great material for the major online newspapers. Nobody has a crystal ball which is why it is important that you have a sound grounded financial plan so you can still reach your goals no matter what happens in the stock market. These six smart money moves considerations can’t change what is going to happen in the stock market, but they can help you prepare for the ups and down of the future.
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