The U.S. stock market has celebrated its 9th consecutive year for a bull run but analysts say that the market is starting to show signs of fatigue and it’s only a matter of time before it faces the next downturn.
The closing bell on Wednesday marked the longest bull run in the history of stock market. S&P stocks, which bottomed out after the catastrophic financial crisis of 2008, have risen 300 per cent ever since. The last time S&P made consistent gains was from 1990 to 2000.
Of course the market’s latest achievement is largely symbolic of the country’s strengthening economy, but it also presents an opportunity to reassess the health of your investments and reevaluate your long-term strategy moving forward.
Federal Reserve Bank’s recent research shows that even 10 years later, the consequences of 2008 financial crisis loom large and many investors fear that the end of the current bull market could spiral into another recession. The study also shows that the 2008 crisis cost each American an average of $70,000 in lifetime income.
However, a survey from the Bank of America Merrill Lynch shows that most investors have recovered from the horrific memories of the historic crisis. So much so that a majority of fund managers are more bullish in their investing approach now than they were in 2015.
But they haven’t ruled out the possibility of a downturn, which could hit at any time. Much of these fears have been reignited by the recent lira crisis which has gripped the Turkish market and is threatening to spill over in emerging markets as well.
Here are some tips from sound financial advisors to prepare you for a big dip ahead.
Don’t Time the Market
After a downturn, most investors try to time the market based off of historical data, which is always a big mistake. Yes, the market will recover, it always does but sometimes it takes longer than usual.
Trying to time the market or making untimely investments can put you in a losing position, according to PagnatoKarp cofounder, David Karp. He says that it might be possible to get it right once based on pure luck but the real winners are those who know when the time is right to get back in the market.
Take a defensive position
If you’ve been in the investment game for a while now and made significant profits from it, it’s crucial to protect your hard-earned money.
Karp says that type A investors are usually in the game to win big but once they reach a certain level of wealth, it makes sense to take a defensive position since thet have a lot of money on the line. You’re no longer playing to win; you’re playing to not lose.
Whenever making any investment decisions it is important to weight out the risk and the reward to see if the investment is worth making. Karp recommends the use of rationale instead of blind faith in the bull market when making such decisions.
Align Your Portfolio with Financial Goals
Michael Conway, Conway Wealth Group’s CEO, says that investors should consider their financial needs such as risk tolerance, cash needs and time horizons instead of timing the market.
If you keep your investment portfolio in line with your financial goals, you’ll be less tempted to switch things around with the ups and downs of the market.
Rebalance once in a While
Every year, take a good look at your portfolio to gauge which stocks outperformed and which ones underperformed the market. You might want to trim back from the stocks that have outperformed and reallocate those funds to the underperformers, according to Blue Ocean Global Wealth CEO, Marguerita Cheng.
According to Cheng, the general rule you should be following is to sell high and buy low, although this rebalancing tactic should be applied no more than once a year.
Have Some Cash On Hand
There is nothing better than cash at the time when you need it. In a sudden market downturn, you should ideally have 18 months’ worth of your living expenses in cash, apart from the interest and dividends you’ll be earning on a regular basis.
Karp says that the cash can come in handy in a mass market sell-off which presents a golden buying opportunity for investors.
