The stock market has long been considered a leading economic indicator. Given the recent stock market rally since the election, it’s fair to believe 'the market' is sending a clear signal of what’s to come in 2017. Oh, but if only it was that easy.
One of the best money articles I read post-election in terms of what do I do now with my investment strategy was written by Ron Lieber of the Times in his Your Money column titled One Crucial Investing Question: Are Your Goals Different Now? Thankfully, this article makes you think long and hard before you decide to change your portfolio strategy.
As for many financial advisors, November 9th was a day that will be hard to forget. Many of my clients were in full panic mode on that eventful morning. The fight or flight response had kicked in and it was my job to not just show up, but to help clients understand why you never want to make major financial decisions purely on emotions. This is when financial advisors turn into financial coaches.
I used Ron’s article many times that morning. Not only did it provide relief for many of my clients, it helped in terms of putting a brake on the fear that was running roughshod over a usually rational mind.
Fear will emotionally hijack your ability to think clearly. It has one purpose and one purpose only and that is to get you to do something - anything, as long as the result is you feel safe once you’ve made a decision. Back in the day, fear allowed us to avoid being lunch for a saber toothed tiger, now it too often causes us to panic and make financial decisions that we end up regretting for years and years of our lives.
Outlook for 2017
The Tale of Two Cities, Charles Dickens classic, opens with the famous line "It was the best of times, it was the worst of times”. Somehow that line feels apropos for what’s about to come.
As a life-long environmentalist and a strong believer in the impact climate change is having on our planet, it’s with shock and much horror that the person selected to run the EPA does not believe any of the science on this subject. In fact, he’s been described as a climate change denier.
Now imagine this nominee to run the EPA gets confirmed and does what so many of us fear, which is to roll-back the regulations and treaties the current administration has so proudly achieved. How will that affect your investments? What if the stock market continues to set new record highs next year while simultaneously the environment continues to suffer greatly?
This dichotomy is playing out in the investment prediction world as well. In the same week I read two articles that had total opposite forecasts. Never have I witnessed such divergent views from such respected publications.
The first article I read, dated December 14th, was published in Bloomberg titled Barclays's Five Predictions for U.S. Stocks in 2017. If you’re looking for an optimistic outlook for investment performance in 2017, this is your go-to article. It’s the ‘best of times’ for sure.
Then, about two hours after I read the Bloomberg article, a savvy client emailed me an article that was published in Reuters a day before titled Stock, bond markets could see sharp declines: U.S. financial watchdog. This was portending the ‘worst of times’ could be coming. Oy! Now what?
Time for a Risk Tolerance/Risk Capacity Assessment
The stock market is unpredictable. Yes, there are numerous ways to analyze past performance as an indicator of future performance, but at the end of the day, there is no crystal ball that will help us see the future.
Risk management is the key to managing and especially coping with your emotions with such unpredictability. Fear and greed are the two emotions that pose the greatest risk to our financial security. Either emotion can trip you up and negatively impact the rational part of your brain that needs to be in charge when fear or greed is the overwhelming emotion.
As my mentor taught me when I first started my financial planning practice; money can either be your servant or your master, it’s your choice. In those words of wisdom is self-empowerment. It’s your choice whether you allow fear or greed to override your financial plan. It’s your choice whether you will master your relationship with money or become a hostage to the needs of your ego. It’s all you.
My suggestion during the holidays is to assess your risk tolerance as well as your risk capacity before we head into the New Year. Your risk tolerance, to keep it simple, is all about being able to have peace of mind during times of high volatility in the market. In other words, if the stock market were to drop by 20% and the headlines were all doom and gloom, are you able to tune out the noise and stick to your well thought out strategic financial plan? If not, this is a good time to review your asset allocation, (how much in stocks, how much in bonds) and adjust accordingly.
Your risk capacity is about your ability to sustain a significant drop in the value of your investments and not have the drop cause a major negative effect on your lifestyle. Risk capacity, although often overlooked, is quite different than your risk tolerance. You may have a very high tolerance for risk, but your ability to sustain the standard of living you’ve become accustomed to, your risk capacity, is another component of risk management that needs to be very well understood as well.
Of course, if your investment time horizon, (how long you have to invest before you retire and begin withdrawing from your investments) is decades away, then you’re best bet is to tune out the noise and stick to your plan.
If on the other hand, you’re like the majority of my clients either already in retirement mode or less than ten years away from that milestone, risk management is no longer some abstract theory, it’s real and it's serious.
Bottom line: To all my valued clients that read my blog, I've got your back on this. For those of you do-it yourselfers, as the saying goes, “To thine own self be true”.
Thank you to all the readers of my blog in 2016. Now, buckle up my friends, as it looks like 2017 is going to be unlike anything we’ve seen in the markets in a very long time.
Photo credit by Stephen Edmonds