Brock Williamson, CFP®
Bull Market Concerns and Having Appropriate Protection
I married Tyra 20 years ago. We spent our honeymoon on the island of Maui. This summer to celebrate 20 years together, we went back to Maui (without the kids). It was very refreshing and quite peaceful without three teenagers running around. We got to our hotel room around noon the first day. After checking in I dropped the bags and hit the pool. I figured I would only sit at the pool for 30 minutes and catch some rays then check out the resort. Well, 30 minutes can quickly turn into an hour and a half. Especially when I get easily distracted talking about finance or baseball with other resort guests.
When I headed back to my room I knew I was in big trouble. I did not have adequate protection from the sun. Actually, I had zero protection. I did not apply any sunscreen. The thought of applying sunscreen briefly crossed my mind just before leaving the room to go to the pool, but I quickly rationalized it away by thinking it would only be 20-30 minutes. The next few days of the trip I suffered with a bright red sunburn which made snorkeling/scuba equipment very painful.
This experience reminded me of the markets and economy today. We’ve all enjoyed the markets as they have been running hot and sunny for a long time. Over the last few years, I have been advocating having adequate protection against down markets by having sufficient safety buckets. In the financial world, your sunscreen is having a safety bucket that includes adequate cash reserves, cash value of life insurance, treasury notes, or annuities with downside market protection. My definition of a safety bucket is any asset that will protect you from getting burnt in a market decline.
Our growth portfolios have been doing excellent at growing values during the market heat wave. It is very tempting to want all of your money in the account that just made 30-40%. But helping you plan and create a diversified approach remains my objective. As we know, it is very difficult to accurately predict corrections. Below are some stunning facts on this bull market and some laughable Wall Street predictions which illustrate why it is prudent to have a safety bucket in conjunction with your growth portfolio.
Over the last decade we have been in a significant bull market, with the market increasing more than 350% since the 2009 lows. But this hasn’t been a smooth ride.
Since 2009, we experienced six corrections. These were all temporary market losses ranging from 10% to more than 33% during the Corona Crash.
Pullbacks, recessions and market crashes happen all the time. But pundits have predicted pullbacks that never happen, and when they do occur, it seems to be when no one sees it coming. Wall Street has been talking about the market being overvalued for some time now. Last August, a headline printed in Forbes that the market was overvalued by 77%. That seems severe! Since that headline, the market is up over 33%.1
Big fluctuations, uncertainty, and woeful predictions are natural events of capital markets, and occur even within bull markets. We should expect them. This is why some of the best investing advice I provide is to ensure your financial decisions are based on your plan, and not the concern of the day. Having an adequate safety bucket for when these corrections occur will keep you from getting outright burnt.
-Aloha and remember to apply sunscreen next time you visit a beach or pool!
Brock Williamson, CFP®
©2021 The Behavioral Finance Network
Source: Forbes, August 18, 2020. Performance based on S&P 500 Index from 8/18/20 – 8/29/21. Includes dividends reinvested. The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. All indices are unmanaged and may not be invested into directly.