Market Volatility Continues as China Raises Stakes in Escalating Trade Showdown
President Trump revealed on Thursday, April 5 that the White House is now considering whether or not to impose an additional $100 billion in additional tariffs on China, following the announcement from Beijing that the Asian superpower would enforce tariffs of 25 percent regarding over 100 American products. The heightening threat of trade war has seen markets turn volatile in recent weeks, and could continue as the talks bring mixed reactions and speculation to investors.
This full-blown trade war could have ripple effects to not only domestic but far-reaching economies around the globe. The threat of tariffs on agricultural products like soybeans – our top export to China – could damage the U.S. economy, in addition to other top exports such as aircraft and engine components.
Investors have become all too familiar with volatility over the past two months, as four of the Dow’s nine largest single-day point declines have happened since Groundhog Day.1 However, selling all of your positions now might not be the most reasonable move for your overall portfolio. With bond markets looking less attractive by the month in our rising interest rate economy, the stock market should remain one of your best investment options. Stocks, as volatile as they have been in the first quarter of 2018 should continue to be a staple in your overall financial planning strategy, depending on your risk tolerance. Some people don’t want any money in the market, in stocks or bonds and that is fine. If you can’t sleep at night, how can you have a successful retirement, even with lots of money?
Here are three ideas to help navigate the murky waters that may precede a market correction:
Realize that bonds are not safe.
The average person believes bonds are safe. Wrong! Bonds are not safe from loss. Not small losses! Not big losses! In fact, you are more likely to lose money in bonds than stocks going forward. The value of having bonds in a portfolio is that they are less volatile than stocks.
Additionally, in a declining interest rate environment, like we have seen over the past forty years, bonds can typically be sold for a gain, adding to the “promised” interest rate, an additional capital gain. Remember, bond values rise and fall inversely to interest rates.
The problem we have today is that we are no longer in a declining interest rate environment where bonds rise in value. We are in a rising interest rate environment where bonds are likely to fall in value and fall by 20-40%, not 1-2%.
What good is adding stability to your portfolio just to sell your bond funds and take a big loss – in other words, bonds may help your portfolio values rise and fall less – only to see a big loss when you cash out.
Aren’t bonds different than bond funds? Yes, bonds have a maturity date at which time you will be reimbursed your entire invested amount with no gain, just the interest you earned along the way… if the company doesn’t go bankrupt and if you hold to maturity. If you sell before maturity you are selling on the open market – just like all bond funds do – and you get what you get, which could be a gain or loss.
Create a long-term plan designed for retirement.
You probably created a long-term investment plan at some point in your working years, whether you designed it yourself or made choices from your 401(k) offerings or used a Financial Advisor’s guidance. Your goal was likely to pay the bills that allowed you to have a good life and have enough left over to save for your retirement.
For many investors, their plan isn’t much of a plan at all, just a target date fund or lifecycle fund in a 401(k) or possibly just buying high powered stocks.
Your priorities change when you enter the retirement red zone, within 10 years of retirement, and your financial plan needs to change too so that it aligns with your new priorities. Now, if you’re like most of us, your top priority is to ensure an adequate amount of income (pension income, rental income, investment income, etc.). You want a plan that provides you the money you want in retirement, even if the market behaves poorly.
Attempt to identify hidden risk.
Most of us are keenly aware of some of the most common financial risks that face us.
Living longer than expected can cause a strain on your money unless you have planned well. Having a plan to give you access to lifelong income is critical for your confidence in your ability to lead the life you want.
Long-term care costs can bankrupt families. You can prepare for this by a number of methods:
Self-insure. In other words, save enough so you can afford to pay your long-term care bills and still afford the lifestyle of your spouse or partner.
Buy long-term care insurance.
Buy a hybrid policy that provides multiple benefits including long-term care. This way you can spend or pass on the cash in your policy if you don’t use it for long-term care.
Transfer assets. Shield your assets by giving them away or put your assets in an irrevocable trust or LLC that you control.
Plan for Medicaid to cover your costs.
Market crashes – We all know that a market crash could be devastating to our retirement plan. Many people have had to delay retirement due to a market crash. As painful as that was for them and as harsh as it sounds to say, they were fortunate the crash came before, not after retirement.
Sequence of Returns Risk – The biggest, yet least known market risk is not actually a market crash but “Sequence of Returns” risk. This is the risk of running out of money because of a few bad years soon after retirement. The sequence of returns is so devastating because few people have a plan for it since it is rarely discussed. Imagine you are withdrawing money from your account every month and the market is rising. Not a problem. Now the market drops. You continue withdrawing money because you have no choice. Now every dollar you withdraw locks in that loss. When the market recovers, your withdrawn money can’t recover since it’s been spent. The combination of a few bad years and locking in those losses can cause you to run out of money earlier than expected.