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Protecting Yourself from Market Drops

As I write this blog, the Dow Jones Industrial Average is down over 470 points, a drop of 2.87%.  This follows August’s 6.6% drop, and puts us in official ‘correction’ territory.  International markets are down as well.

Over the past several months, we’ve written about Greece, China and other headline risks that had a relatively minor impact on stock prices.  Last week, the 1,000 point drop in the Dow indicated that global risks were beginning to spook some investors, and the volatility began.  Chip wrote about what we do in our clients’ investment portfolios during these periods to protect clients who are using their savings for income, and benefit clients who are still accumulating for retirement and other goals.   But that’s only half of the picture.

The other half is planning.

Financial planning is difficult work, because it involves doing things that aren’t easy for most of us.  It’s not fun to dig through your credit card statements and checkbook to see what you’re currently spending, or sign up for YNAB or Mint.com and learn how to use it.  But if you don’t know what you spend today, or what you need to target to sustain your lifestyle on a day-to-day basis, it’s impossible to know whether you’re saving enough to live on in retirement.

If you’re retiring, you can’t be confident your assets will last unless you review your overall financial resources and personal goals.  But thinking about your personal goals is difficult too.  Most people keep themselves so busy trying to get things done, that they rarely stop to ask themselves whether it’s really what they want to do in the first place.

For those willing to do the difficult work of planning, we walk through a Discovery Meeting together to help them decide what’s important to them, and set priorities for dream vacations, helping out family members, and other wants and wishes.  We look at their annual cash flows using tax returns and information they provide.  This work helps us determine if their lifestyle goals are realistic, and if not, we make adjustments together to ensure that the things that are most important to them can be accomplished.

People who have worked together with us through this process are far less stressed when they face market headlines like today, because they know their plan has already factored in the reality of market corrections.  They know their financial security isn’t dependent on the day-to-day gyrations of the stock market.

The Dow Jones Industrial Average’s climbed from 6,500 in March, 2009 to over 18,300 in May, 2015.  After six years of significant market appreciation, it was difficult for many people to appreciate the role of cash and bonds in their portfolios as a buffer against a potential stock market drop.  Clients had begun talking about making their portfolios more aggressive, and financial planning seemed like unnecessary work that could be avoided.  But the best way to protect yourself against a market drop and the stress and worry that goes with it is to plan.

My grandfather used to say if you chose to take the easy road now, life will be harder on you later.  If you do the hard work of planning today, the bumps in the road caused by stock market drops will be much easier for you to take.