Finance Risk #5: market correction part 2 Let’s face it: a market correction, or an out-and-out downturn, is always a risk for retirees. And, while most market watchers don’t expect a sudden plummet like the one in March of 2020, nobody knows for sure what the market will do (or not do) in the short term. In actual fact, there are several threats on the horizon which may end up causing a downturn. We discussed inflation above: if prices for everyday goods and services rise too fast too soon, consumers might cut back on their spending, which could trigger another recession. Another trigger might be the changes forced upon some businesses throughout the pandemic − some will find it hard to adjust to new economic realities (will office-tower owners survive the work-from-home trend?), or even compete with businesses that have expanded rapidly throughout the pandemic (will anyone shop in malls anymore after a year of buying things online?). And, of course, continued political polarization in the U.S., or a “new cold war” between China and the West, are problems about which the market is always worried. Perhaps the biggest threat, however, is simply that equity markets have seen an incredibly impressive run since the start of the pandemic. At time of writing, North American equity markets (particularly tech stocks) are hitting all-time highs and are rather expensive by any traditional measure. It may be time for equities to step back a bit after such a big rise. WHAT TO DO ABOUT IT: get some perspective Thinking about risk will always be an essential part of the investment process. And, it bears repeating: the best investors in the world have made it a habit to constantly think about risks, assessing and evaluating the various possibilities and “what ifs” that lie behind every investment. But they keep risk in perspective. They know that there is no such thing as 100% certainty when it comes to investing. We can manage risk, not eliminate it altogether. The really successful investors have also figured out a very important lesson: that focusing too much on “glass half empty” thinking can distract us fromwhat’s truly important in life. Things such as our family, our personal interests and our health. That’s a lesson worth learning. Risk #6: focusing too much on risk Perhaps the most significant risk of all. With all of the financial challenges and economic difficulties that the world has faced over the past year or so, it’s become very easy to feel negatively about the various financial risks which we may face. Simply put, the mental effect of all of this “lockdown” may be a permanent bias toward pessimism, even after the pandemic is over. But, allowing your concern about risk to overwhelm your ability to adapt to change or plan ahead, or becoming paralyzed regarding making investment decisions while you “wait out” whatever challenges you see on the horizon − that would be a mistake. Focusing too much on risk can prevent us from taking advantage of opportunities that still exist in the market. WHAT TO DO ABOUT IT: trim back exposed sectors We’re not big on making market predictions. It’s difficult − if not impossible − to consistently and accurately predict exactly what the stock market or the economy will do in the short term. That said, common sense should tell us that going “all in” on stocks at the current moment might not be the wisest move. Perhaps the best thing to do right now is to diversify, and prepare for volatility. We’ve talked about the subject of defensive positioning and volatility in detail in several previous issues of CSANews. But a good starting place would be to trim back on sectors and stocks that have seen a dramatic rise since the start of the downturn. Technology stocks are an obvious first choice here, and certainly “concept” stocks (electric vehicle manufacturers, for example, or perhaps marijuana stocks) fit the bill, too. If your allocation to North American equities is high, then perhaps spreading some of your portfolio to other parts of the world (think Asia and Europe) might be a good idea. Cutting back on speculative “high risk, high return” ideas might be a good idea as well − they’re often the ones that get hit the hardest in any downturn or volatility. Above all, remember this: money and investments will always be a vital part of our lives. Even more so when we reach the age at which having enough money gives us freedom to pursue our dreams, live life to the fullest, or cross items off of our “to do” list. But money should never be themost important part of our lives. Keep that in perspective as we move out of this difficult time, and into what comes next. 30 | www.snowbirds.org
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