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Compass Points

Financial Insights for Navigating

Your Life of Possibilities


Don't Push the Panic Button: A Pragmatic Approach for Dealing with Market Uncertainty


Clients phrase it in different ways, but it's a concern that's been coming up more frequently as of late: "I'm nervous about another market crash."

The sense that something bad might be just around the corner is an unsettling one. No one has forgotten the stomach drop—and for many investors, painful losses—of 2008 and its aftermath. Our collective unease is exacerbated by the unrelenting daily news cycle. And our gut tells us that what goes up must eventually come down ... right?

The anxiety is understandable, because anyone who is investing potentially has something to lose. But don't push the panic button just yet. I believe we can find clarity in understanding what we don't know vs. what we do know—and be prepared in a pragmatic, unemotional way for whatever the market has in store for us.

What We Don't Know

The biggest thing we don't know is what the market is going to do tomorrow, next week, or next year. We can try to find answers in the tea leaves of past markets and crystal balls of the financial news. But at the end of the day, it's a guessing game.

Much to-do has been made in the financial media about this being the longest bull market on record. "How much higher can it go?" is the refrain. Again, we don't know. It could retreat before the end of this year. Or it could stay in bull territory for another two years—or longer. If, when, and how much are anyone's guess.

But regardless of what anyone says, there are more productive ways to approach the uncertainty than trying to time the market and making financial decisions based on what we *think* the market is going to do and when.

Let's consider what we do know.

What We Do Know

What I can say with a high level of certainty is that this bull market we're in will not be forever. We may not be able to predict exact market cycles, but we do know the market is cyclical. So, with the understanding that the market will eventually take a turn in the other direction, how do we prepare for that day?

We can start by evaluating three factors that are totally unique and known to each of us ...

1) Your personal investment time frame

The most important factor in determining an investment strategy—in any market—is the length of time you plan to be invested. Or, to phrase it another way, how soon are you going to need the money?

If you are 60 or older, you are likely thinking about (or enjoying) retirement—and you've probably amassed some considerable savings. A shift from bull to bear market could erode a chunk of those savings—and with it, potentially the financial security you've planned for in retirement. That's a pretty steep risk with serious consequences.

The calculus is obviously different if you still have years or even decades until retirement. No one likes to see his or her 401(k) savings decline, but if you are 40 years old, there is some comfort knowing your account will have the time to recover its losses (and quite possibly more) with the next upswing. Painful and frustrating to experience? Yes. Devastating? Probably not.

Your time frame matters ... a lot.

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2) Your personal feelings about risk

How did you feel during the market crash in 2008? Were you checking your accounts daily, losing sleep, or feeling real panic? Or were you bothered but resigned to waiting it out?

Would losing half your money over 18 months be a more powerful negative than the positive of making 50% more than your original investment a decade later?

I don't mean these questions to be facetious. Of course, no one feels good about seeing their accounts lose money. But the degree to which seeing your investments decline affects you—and how you respond emotionally—matters.

If the idea of steep short- to mid-term losses (even with the potential for greater long-term gains) makes you exceedingly uncomfortable, your investment strategy should reflect this with a higher degree of conservatism. Likewise, if you are relatively comfortable with riding out losses for several years, you can employ a more aggressive investment strategy.

Every individual's risk tolerance is different ... and that's OK.

3) Your five-year cash needs

This is related to #1 above, but is less about age than your more immediate financial obligations and goals. It is also more relevant to certain investment accounts, such as after-tax accounts that you may need to rely on more heavily to meet cash needs.

Looking out at the next one to five years, are you planning to buy a new house or car? Are you feeling insecure about your employment status? Are you helping a child or grandchild pay for their education? Are you anticipating any major health expenses? Are you trying to pay off any significant debts?

We always recommend maintaining an emergency cash fund that will cover three to six months of normal living expenses. But if you also have other significant planned expenditures on the horizon, you may want to shore up some additional funds that are sheltered from any adverse market event.

An Asset Allocation Strategy for Everyone

Asset allocation—the disciplined process of diversifying a household's investments across different asset classes to mitigate risk—is one of the best tools we have to proactively prepare for market swings. Asset allocation does not guarantee a profit, nor does it guarantee against any loss--but it can help make the drops less steep and shorten the recovery time. And depending on your answers to #1, #2 and #3 above, an asset allocation strategy can be crafted that is suitable for your unique situation.

To illustrate, here are three hypothetical asset allocation models—selected as examples from a spectrum of possibilities. Within each broad asset class (equity, fixed income, cash, real assets), there are of course many possible investment selections that further nuance a portfolio.

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As your financial advisor, one of my most important roles is to be your asset allocation architect. I survey the market landscape to understand the environment we are dealing with. But it's your personal inputs—your time frame, risk tolerance, and anticipated cash needs—that help determine the kind of asset allocation structure we need to build.

Whether you are a retiree or young adult or somewhere in between, my goal is to construct a balanced risk-reward strategy that is right for your personal situation and can help you meet your objectives regardless of the market's ups and downs.


Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Estes Wealth Strategies is not a registered broker/dealer and is independent of Raymond James Financial Services.

Any opinions in this newsletter are those of Estes Wealth Strategies and John Estes and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.

The information provided does not purport to be a comprehensive description of securities, markets, or other developments. This information has been obtained from sources considered reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information provided is not a complete summary or statement of all available data necessary for making an investment decision, nor does it constitute a recommendation. Asset allocation and diversification do not guarantee profit, nor do they guarantee against loss.

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