Open Your Statements

I overheard at a gathering recently – “I don’t open my statements, it scares me. I just don’t want to know what my portfolio is doing with these market swings”.  What can you do to move from a fear based mindset to one of engagement and empowerment?  Part of creating a healthy financial life is being accountable to where you money is, how it is invested, and educating yourself to economic cycles and how they impact your various assets.mail

Between July 20th and August 25th, the S&P 500 index, a commonly used benchmark, tumbled over 8.0%. When the stock market drops around ten percent after a period of rising prices, it is considered a correction versus a drop of 20% or more which heads us into bear market territory. Market corrections are actually a good thing and you can benefit from them.  A correction helps to cool an overheated market that is moving into unsustainable territory.

A market correction provides buying opportunities.  When you go to the store, do you want to pay full price, or do you want to take advantage of discounts?  If you have cash on the side, a market correction is a great time to buy.  Tax harvesting is another opportunity.  In portfolios exposed to taxation, there are many strategies to benefit from in order to come out ahead in the long run.

You also have some control over the degree of correction you will experience.  First, you need to understand the level of risk associated with your investments.  For example, if you are invested solely in U.S. small cap stock positions, you are taking on a high level of risk and should expect to experience big swings.  Secondly, educate yourself as to how asset allocation will temper, and reduce the risk inherent in your portfolio.  Thirdly, how do you want to structure your portfolios, mitigate loss, and rebalance when appropriate for your personal situation?

You will have greater peace of mind with your portfolios if you take a “bucket” approach.  How do you position your investment assets to incorporate your risk tolerance, time frame, asset allocation, tax efficiencies and withdrawal strategies?

What stage are you at in your financial life – accumulation or distribution?  You want to have different buckets for different seasons and reasons.  Paramount is a short term bucket where you keep money for emergencies and opportunities.  This should include 3-6 months of expenses and will vary based on what kind of income you have and where it is coming from. It will be sitting in a boring, but liquid and accessible, possibly FDIC insured account.  In our current interest rate environment, you will not earn very much on it, but knowing that you can get to it will keep you from panicking over other buckets that are positioned for the long-term. Are you getting close to or in the distribution phase?  How is your bucket positioned with a spigot that can be adjusted to give you a sustainable cash flow given fluctuating market conditions?

What is your personal benchmark?  Why compare your portfolio with what is happening with the DOW, or the S&P 500?  You have better command when you look at your investments from the standpoint of accomplishing your goals and have a probability of success that you feel comfortable with.

Go ahead, open your statements!  With a better understanding of economic cycles, and how to take advantage of them, your money will work harder for you.  With portfolios properly positioned for who you are, what is important, and what you are trying to achieve, you will move from fearful to fearsome.  Of utmost importance is to look at them with gratefulness that you have statements to open – many people aren’t as fortunate.

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