Home About Archives RSS Feed

The Independent Investor: Are You Ready for a Down Market?

By Bill Schmick
iBerkshires Columnist
It has been some time since we have had even a tiny decline in the stock market. Human behavior is such that we expect what has come before to continue into the future. When it doesn't, a whole host of emotions arise and most of them will be detrimental to your financial health.
A new survey by E-trade Financial, a discount broker dealer, reveals that well-heeled investors (those with $1 million or more in equity investments) are as bullish as they have been all year. Almost 75 percent of million dollar players are now bullish as we enter this final quarter of the year. Most of these investors are 55 or older and are significantly more optimistic than younger investors.
Some of that bullishness is understandable given the fundamentals of the economy. Gross domestic product continues to grow slowly and some estimates (such as the most recent survey from the Atlanta Fed) indicate that we could see a greater than 4 percent growth rate in the fourth quarter. Couple that with a fairly consistent improvement in corporate earnings and we have an almost Goldilocks environment for stocks.
This is especially telling since many of the upside earnings surprises are coming from cyclical companies, which really do measure the pulse of the overall economy. The same sort of economic results can be found overseas to a varying degree, which works to improve the outlook for the world's economy in general.
The fact that we are entering the historically best period for the stock market all year has also fueled bullish sentiment. This rosy scenario has resulted in fewer and fewer investors (only 9 percent) who believe that the market will see a down quarter between now and the end of the year, while more than 17 percent believe the markets will gain 10 percent or more by New Year's Day.
But what if all this hype turns out to be wrong? How will you handle it if, instead, markets decline? What if all the great gains we have experienced since the beginning of the year are erased in a month or two? You can bet on one thing: the investments which have gained the most will be those with the most downside. It is not a reason to sell them necessarily, but it is a time to recognize how much loss you are willing to accept.
The range of emotions most of us will feel in a sell-off will range from panic, anger, dismay and the overwhelming need to escape (sell). Well, you might think, I will just sell out now and capture my gains before the decline. When the market declines far enough, I will simply buy back in. That's called timing and we all know that doesn't work. Usually, we sell too early and then buy back too late; resulting in more losses than if you had simply held on through the decline.
I know I can tell my clients until I am blue in the face that the markets will come back given enough time. I can remind them that stocks are much higher today even though the markets dropped 50 percent in 2008-2009, 20 percent in 2011, had a 12 percent sell-off in 2015 and an additional 10 percent decline in 2016. But it is little comfort when they are facing not only a loss of gains, but an actual loss to their portfolios.
One strategy you might want to think about is to reduce the risk in your portfolio. As I have written countless times in the past, markets usually decline 2-3 times a year with each decline averaging between 5-7 percent. We are overdue for a decline. No one knows when it will occur but it will. If you are an aggressive investor, and shouldn't be, maybe drop the risk down a notch or two. You can even raise some cash if you want. It depends on your risk tolerance.
How much risk you should take is directly correlated with how much loss you can bear. As an example, if you can't stomach a 20 percent decline in your overall portfolio, you have no business being an aggressive investor. A moderate investor should not even care if he or she experiences a 10 percent decline. There is an old saying, "if you can't stand the heat, you should get out of the kitchen." That's good advice. If you feel you have become too aggressive over the past year, the time to adjust the temperature is now, not when the markets are in the middle of a free-fall.
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

Support Local News

We show up at hurricanes, budget meetings, high school games, accidents, fires and community events. We show up at celebrations and tragedies and everything in between. We show up so our readers can learn about pivotal events that affect their communities and their lives.

How important is local news to you? You can support independent, unbiased journalism and help iBerkshires grow for as a little as the cost of a cup of coffee a week.

News Headlines
Messy Mix of Ice, Rain, Snow Expected Monday Night
BCAC Taps Community For Needs Assessment
North Adams Historical Society Waiting on Library Room Renovation
Williamstown Fire District Voters to Select New Board Members
Williams Women Advance on PKs in NCAA Tournament
Demartinis Leads MCLA Men to Second Win
Williams Men and Women Win NCAA Cross Country Regional
Pittsfield Preparing Morningside Fire Station RFP
Brien Center Honors Two at Annual UNICO Dinner
Karpowicz Leads Williams Men's Basketball to Season-Opening Win

Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com Visit www.afewdollarsmore.com for more of Bill’s insights.




@theMarket (309)
Independent Investor (420)
November 2019 (5)
November 2018 (4)
October 2019 (9)
September 2019 (7)
August 2019 (5)
July 2019 (5)
June 2019 (8)
May 2019 (10)
April 2019 (7)
March 2019 (7)
February 2019 (6)
January 2019 (6)
December 2018 (4)
Jobs Oil Election Metals Markets Commodities Currency Crisis Greece Stock Market Deficit Interest Rates Wall Street Stimulus Congress Taxes Rally Euro Japan Energy Housing Europe Economy Federal Reserve Stocks Recession Debt Fiscal Cliff Bailout Debt Ceiling Europe Banks Retirement Selloff Pullback
Popular Entries:
The Independent Investor: Don't Fight the Fed
@theMarket: QE II Supports the Markets
The Independent Investor: Understanding the Foreclosure Scandal
The Independent Investor: Does Cash Mean Currencies?
@theMarket: Markets Are Going Higher
The Independent Investor: General Motors — Back to the Future
@theMarket: Economy Sputters, Stocks Stutter
The Independent Investor: How Will Wall Street II Play on Main Street?
The Independent Investor: Why Are Interest Rates Rising?
The Independent Investor: Will the Municipal Bond Massacre Continue?
Recent Entries:
@theMarket: Record Highs Again & Again
The Independent Investor: Attention Retirees!
@theMarket: Phase One Deal Keeps Markets Bullish
The Independent Investor: Fringe Benefits Important as Paycheck
@theMarket: Will Record Highs Beget Record Highs?
The Independent Investor: NCAA Up Against Ropes on College Pay for Athletes
@theMarket: Earnings Give Mixed Signals
The Independent Investor: Will Trump Ruin Thanksgiving?
@theMarket: Markets Await a Brexit Vote
The Independent Investor: Was There Really a Trade Deal?