The big question that I think you need to be asking yourself as we enter 2014 is, “Should I be celebrating my gains and continuing to party on or should I be looking at what my game plan is when things get squirrely again?”
Now let me confess something to you. It’s really hard to be the guy who runs out into the middle of the dance floor and tells everyone to stop having such a good time. I hate being that guy but, again, this isn’t my first rodeo either. I was there in the crash of 1987, and in the tech crash of 2000, and the great crash of 2008. I’ve seen the patterns as a professional investor. I can tell you that they repeat themselves in almost exactly the same way every time. The market gets to levels that people can’t believe, like today, and then the pundits all start saying how much better things are going to get, and then people start worrying that they might be missing the party, and so they get more aggressive as the market gets more expensive, and then the crash cycle starts all over again. No, I’m not here to tell you that the sky is falling. I’m just here to remind you that this show has already played several times before and we all know exactly how it ends.
What should you be doing right now? You already know the four questions you need to ask yourself about each and every investment you own to get a real handle on your risk exposure:
- Is it Liquid?
- Is it Safe?
- Does it pay a good Rate of Return? and
- Is it Tax Free?
Those four questions (known as LSR-T) make up the litmus test that you should run on each of your investments to give you a realistic idea of how things will look after the next crisis. Now keep in mind, most investments pass some of the four tests; however, very few pass all four. The problem I see when I meet with new clients is that very often NONE of their investments pass all four of the tests.
I’m not saying that everything you own needs to be LSR-T, but I am saying that SOME of your net worth should absolutely pass all four tests. If your current advisor has all of your money in things that only pass some of the test, then you know which direction it goes when the market crashes. Despite all of the great news about the stock market, most investors report that they are barely even with where they were in 2008 so that’s a long road to go down again. Remember, if you keep approaching your investments the same way that you have been during the last three crashes, you will likely get the same results. I don’t know about you, but most of my clients are at the age where they are not interested in going backwards anymore, especially when the markets are so hard to figure out and so highly manipulated by government intervention. Most of my clients will accept a more modest rate of return if they can avoid the roller coaster.
If you think things are going to be smooth sailing from here and taxes are going to stay low and we are going to have less volatility and that the stimulus worked, then you might be OK continuing down the traditional path of pie chart investing with everything you have. But if you’re not comfortable with that approach, feel free to reach out and I will personally run your current investments through the tests and see how much risk you are really taking and offer you some alternatives.
Information presented in this blog post is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Discussions and answers to questions do not involve the rendering of personalized investment advice, but are limited to the dissemination of general information and may not be suitable for all readers. A professional adviser should be consulted before implementing any of the strategies presented.