New York: Every week brings a new worry, something or another that could finally, truly, end our eight-plus-years bull market in American stocks.
If it’s not conflict with North Korea, then it’s concern over a damaging showdown in Congress over the federal debt. And if it’s not debt, it’s the possibility of a trade war or a hurricane season to end all hurricane seasons.
Then again, even in years past, there has always been something to fret about. For a while, it was fear of rising interest rates. Brexit set off market alarms, too. And I spent hours after midnight on election night last year writing a column counselling people through what turned out to be a stock market hiccup.
Given how little anyone can know about what will end the bull market and when, most people should try to avoid making predictions, let alone investing based on them. But there is one group of people who deserve to worry at any particular moment: those who will need most or all of their investment money soon.
Consider the people who are trying to scrape together a down payment but who also want their savings to keep up with the rise in real estate prices, if possible. Or the parent — say, me — who hopes to send a firstborn child off to college in seven years. How much money should any of us have in stocks right now?
If you poll investment experts, there is no consensus about a perfect mix of stock, bonds and cash. There never is. But there is probably an answer that is right for you, as long as you know how comfortable you are with the possibility of losing some money and have thought through every detail of what you’re willing to sacrifice if you do.
Two buttons
Figuring out how low your portfolio’s value might drop ought to be much easier than it is. In a perfect world, every brokerage firm and 529 college savings account administrator would have two buttons on their web pages.
The first, a “What if?” button, would let you see how much portfolio pain you’d be in for if your stock investments fell 10 or 20 per cent — or some more apocalyptic amount — and if bonds earned nothing over some period. The second, a “What are the chances?” button, would let you input the portfolio percentage decline of your choosing and then set the site to work estimating the odds of anything like that happening based on what has happened in the past.
If you don’t have access to anything like that, you can at least approximate the “what if” math yourself if you know what’s in your portfolio. (With the age-based funds that some people put their 529 money into, it can take a little digging to figure out what percentage of the investments are in stocks.)
Buying a home
A good financial adviser will put the numbers in front of you and demand that you reckon with them. Paul V. Sydlansky, a financial planner in Binghamton, New York, recently went through this exercise with a couple who hope to buy a home in Spain in two to four years. And because it could indeed take 48 months, they don’t want to leave their money in cash, earning very little, for that long.
So Sydlansky put it to them this way: If they have $180,000 (Dh660,600) split equally between stocks and bonds, a 30 per cent stock market decline would leave them with $153,000. How would that feel if the perfect house came along? Not good, they decided, and they elected to have just 30 per cent of their money in stocks.
This conversation probably gets harder if you’re a first-time homeowner. Sure, you could hope that housing prices in your area would fall as much as your portfolio, but there is rarely precise alignment in the choreography of market corrections and crashes.
So, would you be comfortable passing up the perfect property if your down payment account had fallen 10 or 20 per cent? How would it feel to sacrifice the dream of buying your “forever” home and settle for a starter one? What about buying the bigger house in the second-choice suburb? And let’s say you have a spouse. Better be sure that you two are on the same page. Have you asked?
Now, consider a college savings account, perhaps for a middle-school student. You’re reasonably sure that there will be some kind of stock market calamity between now and when the kiddo leaves home. How bad might things get?
Stocks on sale
It’s tempting to consider how you reacted to the stock market declines at the end of the last decade in figuring out how you might react in the future. If you had decent nerves back then when your child was in preschool, perhaps you were betting that you were buying stocks on sale.
That’s how I consoled myself in 2009, at least. But now that my 11-year-old is seven years away from college (or eight if she takes a gap year), riding another market wave like the one we all rode in 2008 and 2009 seems like a sure path to stomach ulcers.
How bad could things get over the next 10 years? Given how rough things got last time, I asked Howard Silverblatt, senior index analyst at Standard & Poor’s Dow Jones Indices, to calculate what people might have seen if they’d been looking back at total S&P 500 returns (including reinvested dividends) over a previous 10-year period. Any decade ending between January 2009 and September 2010 would have been negative, he said. In the first four months of 2009, you would have been facing a decadelong decline between 21 and 29 per cent.
