Following the post-COVID stimulus hangover in 2022, the bull market has continued to run. One of the key factors was the Federal Reserve’s decision to
Whether Pirates, Adventurers or Investors: Don’t Cover Your Eyes
Published Date : May 16, 2014
A couple years ago my husband and I took our three children to Disney World. My son, who was six years old at the time, wanted so desperately to be brave like his older cousins. He reluctantly walked with me, locking elbows, through the line for the Pirates of the Caribbean ride. As we approached the tippy Pirate ship holding mostly eager able-bodied Pirate enthusiasts, he said “Mommy, you’re going to have to cover my ears.” I suggested very gently that he could cover his own ears if he needed to, to which he replied …”but I can’t…who’s going to cover my ears if I’m covering my eyes?”
There clearly aren’t enough hands when we’re scared: either hands to hold, hands to wring, or hands to cover a frightened eye. In the case of my son, clearly young enough to not yet grasp the difference between real and pretend, this is understandable. For the rest of us “seasoned pirates,” there continues to be a blind eye turned towards some of the realities of our own investing life.
Do you know how your overall portfolio is allocated? Do you think about the considerable risk of any illiquid positions: restricted stock, incentive stock options, or private equity allocations? How do you think your wealth will behave today in a significant equity market sell-off like the 2008-2009 market environment? Does your liquid asset base balance out concentrations of illiquidity? Have you considered every individual, trust or IRA account when thinking about your overall asset allocation? Does that allocation reflect your goals through your asset accumulation phase and how will your needs change through this phase as you near your own retirement and beyond?
According to Federal Reserve Economic Data (FRED), stock market prices, as measured by the S&P 500 Index, fell 57% from their October 2007 peak to a trough in March 2009. The net worth of households and non-profit organizations fell from a peak of approximately $67 trillion in 2007 to a trough of $52 trillion in 2009, a decline of $15 trillion or 22%. Markets began a steady climb thereafter and returned to record levels by April 2013. A 22% decline in household and non-profit organization wealth today retraces that recovery back to a point still below the peak in 2007. Any sell-off in the market hurts, but if you have an overall investment portfolio that is more aggressive than you think it is, you may be in for a big and painful surprise. And if you are nearing your retirement and a market selloff hits, you’re especially likely to feel that pain.
Evidenced by the return of the S&P 500 Index of over 33% in 2013, the equity market soared, so it’s uncomfortable to talk about market sell-offs. Following a year of complacency, markets have begun to reflect fundamental factors and have essentially consolidated for the last several months, leaving returns year-to-date essentially unchanged. Investor bearishness has returned to more normalized levels, which we view as a healthy sign. When the markets are only up and to the right, one would expect periods of consolidation. It’s normal. It’s in the abnormal selloffs, like the prolonged and devastating 2007-2008 credit crisis, that you become acutely aware of the risks in your portfolio.
Strategic financial planning and risk management are exercises we should all do with our eyes and ears open. It is critical to have a proper financial plan in place and an active strategy around concentrated risks or investment milestones. We all say, especially those of us with children, “time really does go by so fast.” Open your eyes and your ears, know what you have in your investments – liquid and illiquid – and what you can expect to experience in any market. Engage in the process and you’ll have a much more enjoyable ride. Land-ho!
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