It’s no secret: stock-markets recently reached all-time highs, and we are in the midst of the longest economic expansion in US history. Let’s be very clear here, this is not a “recovery” that needs to be protected; this is a very, very long expansion, which by many measures has outlasted historical norms.
For many people under the age of 45, when the next recession hits it will be the first time they will have experienced a market downturn while having a considerable amount of financial assets to both grow and protect. That’s not to say the Great Recession of 2008-2009 didn’t affect them; pretty much everyone was impacted in one way or another. These Millennials and Gen Xers likely felt the economic strain in terms of greatly diminished job prospects or decreased pay/bonuses, more so than seeing a substantial decline in their investment accounts.
Now, these 30- and 40-somethings have progressed in their careers, and saved dutifully knowing that the fastest path to retirement is starting early. Many people don’t take full advantage of their 401(k) earlier in their career, while their savings capacity later on may greatly exceed contribution limits.
There’s no doubt that for this age group, they will typically be invested more aggressively today than when they are in/near retirement (i.e. to avoid selling investments in a down market to cover living expenses). Though there is still a need for liquidity in the form of an “emergency fund”, if buying a house is on the horizon, or if you have employer stock options.
It’s also important to remember that what may have worked well for the last decade (like being invested in a large cap growth index fund, with almost no diversification outside of this) is only one segment of a viable investment strategy. When we do enter the next downturn, this is a “strategy” that may not perform particularly well. In fact, most of the “growth” in the stock market during 2019 is back-filling a sharp decline that occurred towards the end of 2018 (you can compare your account balances from 3Q18 and 4Q18, to be sure).
In many cases, people want to get as much of the “upside” as possible, thinking that when things take a turn for the worse they can make a quick and painless exit. The problem with this argument is that people often want to wait until it’s clear that the fun part is over (unfortunately, this means it’s apparent to everyone and market pricing will already reflect this).
Successful long-term investing is not focused upon achieving a single goal, and cannot be focused only on performing well in a single type of investment environment. That’s why it’s important to prepare your portfolio, because repair isn’t always fast, inexpensive, or easy. Laying out in the sun is great, but it’s equally important to keep yourself protected from too much of a good thing.
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This blog was written by Jeremy Bohne, Principal & Founder of Paceline Wealth Management. Paceline is a fee-only investment advisor serving clients in the Boston area, and on a remote basis throughout the country. Paceline specializes in helping tech and biotech executives, physicians, and those seeking financial planning services.