Ahoy there! Most of us are familiar with a lifeboat or “muster” drill. It’s an exercise that is conducted by the crew of a ship prior to embarking on a voyage. The purpose of the drill is to prepare passengers for a safe evacuation in case of an emergency, such as bad weather, fire, equipment malfunction, a collision, or some other catastrophic event. During the lifeboat drill the passengers become familiar with the emergency escape route, most efficient path to board the lifeboats, location of the life vests, plan once disembarked, and many other important safety measures.
The key to a successful lifeboat drill is that it’s done under calm conditions, before the ship leaves port. The crew, passengers, and ship aren’t in peril. The weather is fine, the ship is docked, and everything is functioning properly. If a crew were to attempt a lifeboat drill while out to sea and under duress, it would be too late. Less than desirable outcomes would likely occur. It’s much easier to hold these drills when everyone is “of sound mind.”
At Woodward Financial Advisors, the timing seems almost perfect for our latest “financial lifeboat drill.” Apart from a few recent instances of increased volatility, the stock market has been quite calm. The market has shrugged off seemingly volatile world events such as the US Presidential election, Syrian War, Brexit, terrorism in Europe, and the North Korean nuclear threat. While volatility has been low even in these very uncertain times, we know that over time the market will experience periods of heavy volatility. Just like maritime history points to rough seas as being part of the risk of sailing, down markets are part of the trade-off to being a long-term investor. Dealing with down markets is the compensation we must pay to achieve the meaningful expected returns of these same markets. Just as the lifeboat drill educates us so that we’re not caught off guard when nautical danger approaches, good investor education teaches us that neither the reason, nor timing, nor length, nor depth of the next market downturn will be known ahead of time. History has shown that volatility spikes and market downturns happen unexpectedly.
The continual process of setting expectations is important to us here at Woodward. It’s an ongoing exercise. Just because one was able to weather a market downturn in the past doesn’t mean she or he is prepared for the next one. Amazingly, it has already been over eight years since the bottom of the market in March 2009 during the Great Recession. While the market hasn’t gone straight up from there, it certainly has been a long time since we’ve had a substantial protracted downturn. It’s easy to get complacent when things are humming along nicely. While we’re here in port under sunny skies, let’s go over some things to keep in mind when the seas start to get choppy:
- Your goals have been well thought out. Your goals, carefully communicated in the comfort of our conference room, over the phone, and via email drive how we invest your resources for the long term. Short-term market volatility should not impact your long-term goals.
- Your risk tolerance has been assessed and reassessed. Through our process, we have had conversations together about risk, you’ve taken analytical risk tolerance assessments, and we’ve touched on the portfolio risk virtually each time we have a review. We have a high degree of confidence that you are in the right portfolio mix for this stage of your life.
- Your plan has been stress tested. We periodically update your Financial Independence Analysis to make sure you are still on track to be able to reasonably achieve your goals. When we feel that you aren’t as comfortably in the “confidence zone” as we’d like, we let you know. In those cases, it’s possible that adjustments to goals, spending, or other things may be necessary down the road, and we’re here to help you through those decisions.
Uncertainty and market declines are part of the nature of investing. It’s not pleasant, but embracing their inevitability is important to a less stressful investing experience. If investing outcomes were certain, like money markets and savings accounts, we wouldn’t expect much of a return. When the next downturn occurs, it may be protracted, it may be sudden, and it may accompany some very scary world events. Just know that it’s not permanent and that you are prepared to weather it.
Your crew at Woodward is here to help, whether the seas are rough or calm. Bon voyage!