September Commentary & Pre-Recession Checklist
Get out the sparklers. Put on your dancing shoes. Pop the champagne! We are now living in the longest bull market in American history. At over 9.5 years, this bull market has now surpassed the great boom of the 1990s. While still not the strongest bull market in history, this bull run is making an impressive move up that list as well. By the sheer fact that it has lasted for so long, combined with the depths of the recession being so deep, the gains on the way up are significant. The problem is, as we continue to make our way into the record books, it still doesn’t feel that good to many.
Throughout this bull run, stock markets have continually climbed the wall of worry. Doubters have held a prevalent place throughout this expansion - and, rightfully so, as there is much to worry about. The last recession was so severe that it is hard to get out of our memory. In behavioral finance this is known as anchor bias, when we anchor our expectations to recent events. The problem is past history is seldom a good predictor of future events.
Without a doubt, the doubters will eventually be right. Markets don’t go up forever, and definitely not in a straight line. Current economic data does not show that a recession is imminent. Our Economic Dashboard remains completely green. However, prudent investors should always prepare for the next downturn. And, just as you prepare for a hurricane when things are calm at the start of hurricane season, investors should prepare for a market downturn when markets hit all-time highs. We are entering the investment world’s equivalent of hurricane season.
As such, Allegiant developed our own proprietary Pre-Recession Checklist utilized for each and every client, shown below. This checklist is an important tool we use at all times, but it becomes even more valuable as markets surpass all-time high levels. Many of these checklist items are regular parts of our review meetings and this is why those meetings are so important. Don’t be surprised if you hear us talking about this checklist more.
Minimizing or eliminating simple mistakes is often the difference between success and failure. Checklists, no matter how mundane, are a key tool to increase your odds of success. For those wanting to understand more about this phenomenon I would recommend reading Atul Gawande’s bestselling book The Checklist Manifesto. My hope is sharing this simple checklist with you helps stir up conversations that uncover new planning techniques to increase your odds of having a successful financial future. Please feel free to pass it along to friends and family. I believe they could benefit from the extra level of preparedness as well.
If you would like to see more data and charts about the economy and various financial markets, please see our Monthly Insights book, published at AllegiantPA.com.
Benjamin W. Jones, CFP?, AIF?
CERTIFIED FINANCIAL PLANNER??
Chief Investment Officer, Principal
Allegiant Pre-Recession Checklist
- Step 1: Review the Current Model Allocation
Is the current model allocation still appropriate for the needs and goals or have the needs and goals changed over time? If it is still appropriate, move to Step 2. If the model is no longer appropriate, dive deeper into the new objectives and design a new model portfolio.
- Step 2: Review the Current Model Allocation Drift
Is the portfolio invested to the model or has it drifted away? If the portfolio is within acceptable ranges, move to Step 3. If not, understand how and why the portfolio has drifted and then move to Step 3 before rebalancing.
- Step 3: Review the Strategic and Tactical Allocation
Are there strategic or tactical changes to the model allocation that should be made based on current market conditions or current needs from the portfolio? If not, and the portfolio is still within acceptable drifts, move to Step 4. If there are strategic or tactical changes to make, or the portfolio has unacceptable drifts from Step 2, adjust model percentages and rebalance the portfolio.
- Step 4: Review Financial Needs
Is there a need for any extra withdrawals from the portfolio within the next year or two? If not, move to Step 5. If so, build an adequate reserve fund (or bucket of cash) to cover those expenses. This will ensure you are not forced to sell assets when they are down.
- Step 5: Buckle Up
Markets will one day decline. Making sure you understand your portfolio and the strategy to get you through a recession will allow you to hold on during the turbulence. This means buckling up emotionally and fiscally (e.g. emotionally: understand the huge difference between temporary declines and permanent losses; fiscally: put off expensive decisions until the recession is over). Understanding how you will react under certain circumstances and how much flexibility there is in your budget are key ingredients to recession living.
Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance in no guarantee of future results. All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. The Dow Jones Industrial Average is a price weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Russell 3000 is a market capitalization weighted equity index encompassing the 3,000 largest U.S. stocks. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The Emerging Markets Index is a float-adjusted market capitalization index that consists of indices of 21 emerging economies. The CBOE Volatility Index is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. The Shanghai Composite Index is a stock market index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The ISM Manufacturing Index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The Non-Manufacturing ISM Report on Business is a purchasing survey of the United States service economy, published by the Institute for Supply Management. Investments involve risk including possible loss of principal amount invested.