When Mr. Ms. Liz takes me on a particular grueling mountain bike ride, my mantra is: “What can I control? Speed and Attitude.” Because once I’ve committed to a ride, that’s truly all I can control.
The same mantra works when thinking about our investments and our financial goals.
Last week was terrible for the stock market. The S&P 500 went down 3.7% to 2,762. People . . . are . . . freaking . . . out.
The last time the S&P closed close to 2,762 was way back in January on the 11th. What were we doing on January 11th? Celebrating. Yes, celebrating that the S&P 500 was up 3.5% for the year.
So this same result, separated by two and a half weeks produces a completely different reaction. Freaking out . . . or celebration. Interesting huh?!
I’m writing this on the morning of February 5th, the S&P 500 is up 3.3% for the year. If the market continued at this pace, we’ll finish the year 34% ahead. I’m not suggesting that would happen, but if it did, we’d all be patting ourselves on the back for what brilliant investment strategists we are.
But, instead we are freaking out. And who knows, it may continue to plummet and turn into a true bear market. If you read last week’s post, you know I’m staying the course. Continuing to invest aggressively for a retiree.
How do I sleep at night? Not great, thanks for asking but my poor sleep habits aren’t due to concern over my investments. My cash cushion helps me sleep. 15% of my invested assets are sitting in CD’s and cash. That 15% represents 7 years of my current spending. This is my dry powder if the market tanks.
I laid out my drawdown plan in this post: How I’ll Fund My Retirement. I intend to live on that cash when the market drops 10% from it’s all time high and replenish it when the market returns to the high. With this cash, I won’t have to sell when the market is low. Because you don’t really lose anything unless you sell.
This cash cushion reduces my speed but improves my attitude. And, yes, with the market performing as it has since I retired, I would have been way better off to be fully invested. I just did the calculation and it made me a bit sick to my stomach–two more years of expenses would have been covered. But the stress wouldn’t have been worth it.
So how are you feeling? Are you freaking out? If you truly are, this may be a good time to reassess your risk tolerance. That’s just a fancy way to say maybe you have too much in the stock market. Because if it scares you too much, you’re likely to do something unwise. Like sell your investments when they are down and then you really lose.
Do a quick gut check. Take the total amount you have invested in stocks and stock mutual funds and multiply it by 35%. That’s how much you’d lose in a typical bear market. Could you keep on keeping on? Or would you sell?
If you’d sell, you have too much in the stock market. Google risk tolerance questionnaire and look for one from Vanguard or Charles Schwab. Answer the questions and it will suggest a more appropriate asset allocation for you.
I have to admit, the thought of losing 35% makes me sick.
But I wouldn’t have to change how I live. I’m sure I’d cut some expenses. Just like I did when we were in the great recession though our earnings weren’t impacted much. A bit less eating out, a bit less traveling, more careful shopping etc.
And I know I wouldn’t sell. Because I’ve been through it before. Here’s the chart for my entire investing history–1990 to today:
You can barely see the blip that was last week. I’ll stay invested because I’m convinced the market always goes up. Over the long term, it always has.
All I can control is speed and attitude.
Did you do the 35% downturn calculation? How did it make you feel? Do you need to change anything so you can sleep at night? Tell me about it in the comments!
I was going to update this after Monday’s continued sell off but the answer remains the same. I’m keeping on keeping on. If you’re freaking out, do the gut check and take a risk tolerance quiz. If it gives you a recommendation significantly different from where you sit today, start working out how you can get your investments to align better with your risk tolerance. Seek out a real expert–a fee only financial planner who meets the fiduciary standard. You don’t want to lose sleep over your investment allocation.
Investing is risky, this reflects my opinion and is for entertainment purposes only. Proceed with caution, do your research and seek professional advice if necessary.
Photo credit: Mr. Ms. Liz in the McDowell Sonoran Preserve, Scottsdale, AZ