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Market corrections: Always be prepared

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A law of physics for long-term investors to remember: What goes up must come down. Stock market corrections are inevitable. Brian Kilb and Marc Amateis discuss in a Money Talk Video how to prepare emotionally for downturns. A transcript follows.

Brian: Hey, Marc, I’m sure you’re getting a lot of the same phone calls I’m getting. Clients are apprehensive. They’re hearing a lot of buzz about the potential for a correction. As you know, it’s been over 900 days since we’ve had more than a 10% correction, and those things typically happen every other year or so.

So I understand that people are waiting for the other shoe to drop. What are you telling people in terms of preparing for what will inevitably be a correction?

Marc: Yeah. You know, Brian, I think with the markets hitting all-time highs, people are getting a little nervous.

I think that’s the wrong approach. I think the right approach is for a client, along with his financial advisor, to determine what his risk tolerance is. This should have been done long ago – to determine how much money he wants committed or she wants committed to the stock market – and then stay that course.

Brian: I couldn’t agree more. I think it’s so much more about not anticipating or reacting to the inevitable correction. It’s about being prepared for the correction. And I think the way you prepare for a correction is making sure that a couple things that you can control are in place. One would certainly be that you’re balanced, as you mentioned, that your allocation is right – for whatever may come down the road.

I think valuations are something that you can focus on to make sure that your portfolio allocation is right. Is the market ahead of itself? Is the market cheap? Decisions in terms of rebalancing your portfolio oftentimes can be directly associated with valuations.

And then I think, finally, another thing to pay close attention to is where we are in the business cycle. Is there momentum behind the economy that may lift stock prices, or may there be some headwinds that you might want to consider in terms of pulling things back?

Marc: Yeah, and you know, Brian, from an investing standpoint, if you do pull out of the market in anticipation of a correction and you’re wrong, now what do you do? You know, you’ve got to make two perfect decisions: When to get out and when to get back in. Even the pros can’t do that.

And the other thing is when you look historically, anytime we’ve had a 10%-20% correction in the market, on average, it only takes about four months to break even. So, you know, investors should relax. That’s part of investing. If you’re going to invest, you have to accept the ups and downs.

Brian: So in anticipating what may come down the road, really what we’re trying to do is prepare for the inevitable, and I think as we think about rebalancing, what are some of the trigger points for rebalancing right now?

Marc: Well again, hopefully, you’ve been doing it along the way. But if you’ve gone along and allowed your portfolio to get a little bit out of whack, don’t wait. We kind of have a saying here: It’s never too late to rebalance. So get back into your comfort zone.

I tell clients all the time, if you’ve got 20% of your money in the stock market and you can’t sleep at night, that’s too much for you. Because, again, you want to avoid putting yourself in a position where you make a bad emotional decision and panic and get out.

Brian: These are emotional reactions to things that make people bad investors. You want to take emotion out of the equation, and I think to do that, you focus on a very defined asset allocation, you focus on staying within those bands of comfort in terms of your stock exposure and risk, and you make it a very rational, very non-emotional exercise. That’ll keep you safer throughout any kind of turmoil.

Marc: Exactly. That’s right.

Brian Kilb is executive vice president and chief operating officer of Landaas & Company.

Marc Amateis is a vice president and investment advisor at Landaas & Company.

Money Talk Video by Peter May
(initially posted July 24, 2014)

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