Having the Right Investment Strategy Brings Happiness in Volatile Markets
About the author: Chris Abts is the President & founder of Cornerstone based in Reno, NV. He helps people to better manage their wealth so they can focus more of their time on what truly brings meaning and fulfillment to their life. Abts is also the TV show host of Redefining Retirement, which airs every Sunday evening at 5:30pm on KTVN Channel 2.
Over the past few months, volatility in the markets has increased significantly. On September 21, 2018, the S&P 500 was at 2,940 points. Three months later, on December 24th, the S&P had dropped to 2,346. That’s a drop of 20% over that three month time frame. Yet, during this tumultuous time in the markets, I watched many of our clients walk into our office with smiles on their faces. In other words, they’re not worried. In fact, they’re happy and content. Why? Simple - having the right investment strategy can bring happiness in volatile markets.
The key is to not only have the right investment strategy, but to also understand what investments you hold in your portfolios and why you hold them. By doing so, not only do you tend to not worry when the market drops, but you can also benefit from those market corrections as well. The right investment strategy should not only help protect you from these types of events, but will also allow you to benefit from them.
The biggest mistake I see investors make is not understanding the risk they are taking. In my experience, investors tend to have a fairly good understanding of how much they are earning, but they typically are not aware of how much risk they are taking in their portfolios. When you are getting close to retirement, it is critical to understand that markets can change quickly. So make sure your risk exposure is in-line with your risk comfort level.
Providing that your risk exposure is in-line with your risk comfort level, your investment strategy should be designed to support your goals. For example, if you are planning to retire within the next five years, or if you are already retired, then it is vital that your investment strategy be supportive of this goal. One method we use at Cornerstone is what I like to call the Three Bucket Strategy, and it’s a great system to follow to make sure your investment decisions are supportive of your goals. To illustrate, imagine you have three buckets and your job is to allocate your money appropriately among them, and then invest in those strategies that best support your goals.
The first bucket is for your emergency savings. In my experience, I find that most people have a pretty good idea of how much they want in traditional savings to handle such emergencies. The second bucket would be used to provide the appropriate amount of stable & dependable income that you have determined you need or want to come in, each and every month, to support your lifestyle. In essence, this bucket allows you to live the lifestyle you want, without worry, regardless of what is happening in the markets or economy. Some common examples of what one might see in this bucket would be pension, Social Security, annuity or rental property.
The third and final bucket would be considered your reserve bucket. In other words, this is everything else you have. These are assets that you don’t consider to be your emergency savings and that you DON’T need to provide you with safe, consistent income. The purpose of this bucket is to provide additional financial security and to enhance your lifestyle. Common examples for these assets might be travel, health care, legacy, or charitable gifts to name a few. These funds should be invested according to your risk tolerance and your time-frame. Yet, how this money is invested can make all the difference. For example, if these funds are invested using the right investment strategy, then regardless of your risk tolerance, you could have benefited from this recent market drop.
However, if you’re not sure if you have the right investment strategy, or if you were surprised by how much prices can quickly drop in a market downturn, I suggest you view these recent market events as a signal to give us a call to have a conversation with one of the independent, fee-based financial advisors on our team. Once that’s done, the next time the markets drop, you too can sit back and relax and have a smile on your face too.