The Elephant in the Room

December 1st 2017, by Robert B. Miller

Can we talk about the elephant in the room? The market has been generous for a number of years, with recent returns in the double digits. However, we know that the market “giveth” and the market “taketh away.” It’s simply the market’s cyclical nature. I believe that the “taketh away” part is the elephant in the room, and it might be good to acknowledge its presence.

I’m not making a prediction about when, but at some time in the future we will experience a market correction. What should we do to prepare?

First, we should not fall prey to the fantasy of thinking that we can time the market. To successfully time the market you’ve got to get lucky twice. You have to guess when the market is at the top so you can get out, and you have to guess when the market is at the bottom so you can get back in. No one has ever consistently predicted the top or the bottom of the market.

Instead, the wise approach is to invest with your true risk tolerance and known time horizon in mind. If you are able to withstand large drops in the market and have many years ahead of you before you need the money, you can take more risk and invest more aggressively. If you are in or near retirement and if you have not already done so, you may need to dial back on the risk you are taking and invest more conservatively.

Also, as we consider the possibility of a future market decline, we should have adequate liquid cash on hand to help us navigate the choppy waters. We don’t want to get caught in the “double whammy” where the account value is going down because of a bad market and at the same time we are withdrawing money from the account.

Many of the people who have been with Master’s for a number of years know what it means to weather significant market downturns and are already positioned in accounts that are appropriate for the level of risk they wish to take. As they continue steadfastly on a wise course when the inevitable economic storm clouds arise, they stand to be rewarded when the good weather returns.