Roller coasters and theme park rides have new competitors in town – the financial markets. Stock indices such as the Dow Jones Industrial Average and the S&P 500 have been taking investors on a gut-wrenching ride over the last month. However, most of us would rather do without the market’s stomach jolting drops, loop-de-loops, and whiplash direction changes. While investors cannot control the markets, there are ways that we can prepare in order to keep our feet on solid ground and help stabilize our emotions during times of market unrest.
The Wall Street Journal recently published an article, “Lessons on Investing From America’s Richest Family,” on five fundamental ways the rich cope with market volatility and protect their nest eggs.
The very wealthy have a plan.
I believe it’s not a coincidence that having a plan is at the top of the list. One of the first things we highly recommend to most, if not all, of our new clients who come onboard is a financial plan.
Having a financial plan will help keep you focused on your life’s goals and objectives and to not falter in short-term market turmoil. For instance, bad or blurred vision can cause a person to experience headaches, nausea, and/or a loss of balance. Likewise, not having a plan in place that gives proper financial vision can throw you into a tailspin when markets become turbulent and leave you feeling mentally nauseated.
A thorough financial plan should cover aspects such as: cash flow (expenses and income), assets and liabilities, insurance coverage and future goals that you would like to accomplish. A financial plan forms the basis of developing a solid investment strategy. Wise investors establish a plan before they select their investments.
The very wealthy live below their means.
Living below your means is obviously relative to your level of income or wealth. I believe a better way to say this is to live prudently. Living prudently means that you spend sensibly and are far-sighted in your financial decisions. Market volatility will be less threatening if you have not spent everything you’ve made (or more) and have saved for gloomy days.
At Monterey Private Wealth, we encourage our clients to keep at least three to six months worth of cash reserves to cover expenses if, and probably even when, life gets bumpy. According to the WSJ article, Martin Halbfinger, a managing director at UBS, states that “every investor should have a ‘SWAN’ account—for ‘sleep well at night.’”
The very wealthy value cash flow.
The number one rule as an entrepreneur is: don’t run out of cash. Lehman Brothers, the biggest bankruptcy in U.S. history, had 639 billion in assets on their books when they went under—simply because they ran out of cash to meet short-term obligations.
Investors can sometimes be lulled into false security when they see a growing balance sheet. In 2008, these investors were left exposed when housing markets collapsed and people who were over extended on their homes didn’t have the cash to meet their debt obligations and other financial needs.
To prevent becoming a victim of this pitfall during economic downturns, make sure you are well aware of your expenses versus your income. If necessary, create and implement a budget. Yes, I said the “B” word—budget. (Click here to read an article by Gary Alt, partner at Monterey Private Wealth, on creating a more meaningful budget that's based on your personal values.) Make sure to track your budget to measure how well you are doing to meet your goals.
The very wealthy focus on risk, not return.
Most people have been trained to be speculators rather than investors, though they often don't realize it. The Wall Street mentality pushes people to maximize their risk by chasing yesterday's hot performers. In doing so, investors find themselves unable to bear the excessive volatility of their portfolios when markets start to seesaw.
At Monterey Private Wealth, we believe investors should take the least amount of risk necessary to reach their goals, and that they should earn the maximum reward for every risk they take. You should formulate an investment strategy that matches your financial objectives, but doesn’t expose you to unnecessary risks.
The very wealthy hang on.
Although there are reasons to sell in a down market, such as tax-loss harvesting, the WSJ article states that the “super-rich don’t sell because they are fearful.” This is where a financial plan and being well aware of your long-term goals and objectives will help you from selling out at the bottom and jumping back in after the market has already rebounded.
If August's roller coaster of a market has made you on edge, it’s a good time to review your financial plan. If you don’t have one, it’s an even better time to get one. Feel free to contact us if you have any questions regarding your financial plan.
on 2012-11-12 23:05 by Trey Oler
This is an article I wrote in August of 2011 when markets were plunging and many days saw three digits swings in the Dow Jones Industrial Average. Just like last year, markets are taking investors on another roller coaster ride. The five timeless principles outlined in this article to help investors cope with short-term market fluctuations are just as important as ever.