The market: What goes up must come down

Fiscal Therapy: The Market: What goes up must come down

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It’s official: the U.S. stock market has entered the longest bull market in its history. Since the stock market hit bottom in March 2009 during the financial crisis, U.S. stocks are up well over 300%.

What does this mean for you? What goes up must come down. It’s inevitable the stock market will experience a downturn, and plenty of economists are predicting sooner rather than later. Here are three things you can be doing now to prepare for the next bear market.


Fatten up in times of plenty

With the economy buoyant and the job market strong, now’s the time to check in on your financial health and shore up your weak spots.  Prioritize the following:

  • Build up your emergency savings. This should be enough to cover 3 to 6 months of spending and debt payments and should be kept in cash.
  • Pay off high-interest debt like credit cards. It’s never good to carry high-interest debt, but you especially don’t want to be stuck with large interest payments when the economy goes south and money is tighter. Get ahead of the game and wipe out that debt now.
  • Make sure any savings you plan to spend in the next two years is in cash, not the stock market. For example, if you’re planning on paying college tuition or buying a house in the next two years, that money should not be invested. When the funds you need are kept in cash, you can weather the ups and downs of the market. Short-term market losses aren’t a problem because nothing you need in the short-term is invested! (See our previous post on where to keep your cash.)

If you need to cut your spending to achieve these goals, then do it.  You’ll thank yourself later when times are leaner.


Get going, get a plan

If you missed out on this market rally, don’t worry: it’s never too late to start investing.  Even if you had invested at the very peak of the last bull market in 2007, your investment would have more than doubled by now.

The moral of the story? If you haven’t yet implemented a plan for investing, now is the time. Here are some basics to get you started. (The following assumes you have a healthy amount of emergency savings and no high interest debt.)

  • Contribute enough to your employer’s retirement plan to max out any match your employer offers.
  • Keep costs low and know what fees you’re paying.
  • Be smart about risk. As a rule of thumb, the percentage you should have invested in equities (things like stock index funds as opposed to bonds) is around 110 or 120 minus your age (or for those with a lower risk tolerance, use 100 minus your age). For example, if you’re 30, somewhere between 70% to 90% of your long-term investments should be in equities. Consider using a low-cost robo-advisor to manage your allocations (check here for our recommendations).


Stay the course

Let’s talk about long-term investments and put our current market climate into perspective. On average, the U.S. stock market experiences a 20% decline — also known as a bear market — every 3 ½ years. That means the average retirement investor saving for 30+ years can expect about 10 such market tumbles. But while the market rises and falls, what has remained constant over history is steady, long-term growth, averaging 10% annual returns since 1928.  In short, we expect both short-term volatility and long-term growth.

When the stock market does inevitably fall, the typical human reaction is to panic and sell. That’s a mistake, as you’ll tend to miss the inevitable market upswing. Develop the habit of sticking to your investment plan now, when times are good. And when the market does drop, you’ll already have the systems in place to stay the course.

Here are some practical steps you can take to help ensure you stick to your investment plan:

  • Automate investments. You’re more likely to save and invest if you automate the process. Plus, you’ll minimize the temptation to make emotional investment decisions based on short-term market volatility. Set up monthly automatic transfers into your retirement and investment accounts, and have those funds get automatically invested according to your portfolio allocation (if the feature is available). Consider using a low-cost robo-advisor or financial advisor to handle the investment management and portfolio rebalancing for you.

  • Don’t obsessively check your investment account balances. Short-term performance is not a concern in your long-term accounts. Resist the urge to check on your investments every day or — even worse — to buy and sell based on short-term market movements.  Set it and forget it is your mantra.

  • Make it a team effort. If you’re married or otherwise attached, make sure you and your partner are on the same page and communicate periodically about your investments. This will engender buy-in from both of you and give your investment plan inertia. If you need more help, consider engaging a financial advisor, who can help you develop and stick to your plan.

What I'm Reading

A ‘Generationally Perpetuated’ Pattern: Daughters Do More Chores
By Claire Cain Miller, The New York Times

It should come as no surprise that on average girls do more chores than boys. But did you know parents on average pay girls less for chores and allowance? Research suggests that these patterns and expectations parents set for their children early on have lifelong ramifications. For parents (and parents-to-be), it’s worthwhile to think through your approach to chores.

I recommend not paying your kids for tasks which they should handle as a member of the family and a growing human being. However, for chores above and beyond their basic responsibilities, go ahead and pay them. For example, my 6 year old is not paid to brush his teeth, clean his room, or take his dishes to the sink. But he does get paid if he helps me fold clothes or clean the floor (a surprisingly fun activity for young kids).

Research also indicates that how spouses share the labor at home influences your child as an adult. The rules and routines in your home are shaping your child’s perception of normal, so take the time to set up a thoughtful plan for your chores and housework — your children will thank you later.

8 Women on the Biggest Money Fight in Their Relationship
By Cari Romm, The Cut

Fights between couples about money are rarely about the money, as this article full of personal stories shows us. Hopefully these personal stories make your own feel more “normal.” When it comes to money, it’s worth the fight to save the relationship. Learn to fight fairly.  Talk about it, don’t hide it. Work through it, be a team, compromise, show empathy, and move forward.

Ready to go deeper? Check out our top financial planning resources here.