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April 26, 2017

Enjoy up markets but be prepared for down markets

By Kevin Theissen

Here’s a stock market prediction for you: It will crash.

Winter is coming. Wait, you mean spring, right? Nope, winter in the market is coming.

We are currently in an eight-year bull market. Bear markets, defined as a period where the stock market goes down 20 percent or more, from highest point to subsequent lowest point, happen frequently. From 1900-2014, there were 32 bear markets. Statistically they occur about one out of every 3.5 years, and last an average of 367 days.

Now you probably want to know when it will crash. Nobody knows exactly—but the market will eventually fall so hard and fast you’ll feel queasy. That’s just what it does. It goes up and it goes down. The important question, however, is what you do when it goes down.

What to do? Prepare now, during an up market, for the inevitable down market.

Fear the right things

Stay in the market. Don’t fear the market. Most retail investors buy on greed or euphoria when markets are going up and then sell on fear or pessimism when markets are going down. So the result becomes buying high and selling low—or the exact opposite of what an investor should be doing!

So, don’t be afraid of market losses. Be afraid of fees, taxes, and inflation.

Fear the high and hidden fees of mutual funds and annuities. Be mindful of the tax implications of your investments. And be afraid of your real return, after accounting for inflation.

Investment allocation

You need a good investment plan (and financial plan) and stick to it. This is critical. A solid asset allocation will help you get through all markets, both psychologically and financially. You need to put a plan in place that works in good markets and in bad.

You also need to do some gut searching about how you will react in a down market. Experienced investors already know how they’ll handle a falling market while new investors will learn sooner or later.

Now that we are in a long-running bull market, take a hard look at your investments and ask yourself the following question: Would I stick with these investments if they dropped 40 percent this year? If the answer is no, you need to rethink your investments immediately, not after the market starts to drop.

Be prepared 

Investing isn’t much different from any other aspect of financial planning. It’s about being prepared.

We save up a couple months’ expenses in an emergency fund just in case something unexpected happens. We pay insurance premiums on the chance that we break an arm or rear-end another car in traffic. So, we should also prepare for the worst case scenario with our investments.

Knowing that the market goes up and down, and that it will crash again, can help you consider your current investment plan. It can also help you prepare for the inevitable emotional reactions you may have.

Kevin Theissen is principal and financial advisor at Skygate Financial Group, LLC., located on Main Street in Ludlow. He can be reached at kevin@skygatefinancial.com.

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