Terrifying Predictions

If we all were able to know where the market was going to trade, we’d all be rich. But that’s not possible, not even with the best of inside information. The market, the economy – it’s all a very complicated machine with lots of inputs and outputs that make predictions and short-term forecasts a fool’s errand.

The reality is that no one can forecast where the economy’s headed. Indeed, there’s an old joke that economists have predicted 19 of the last 15 recessions. But it’s not a joke. 

The second thing to keep in mind: Recessions are a fact of life for investors. We just don’t know when they’ll occur. The best approach, in my opinion, is to be prepared at all times.

Recessions Happen

You can do that by paying close attention to your portfolio’s asset allocation. The key is to have enough funds outside of the stock market to carry you through a typical stock market downturn, which might last up to five years.

Just as important, this portfolio design can help you sleep at night. If you know that a recession could occur at any time, but you also know that you’re well positioned to weather it, you need not worry—and need not react—when a recession does strike.

One of the scary things about market declines is that it’s hard to know when or how they’ll end. We saw that most recently in 2020. No one knew how quickly vaccines might be developed or how effective they’d be. But as with each prior downturn, the stock market recovered and ultimately went higher.

The standard investment disclaimer tells us past performance is not a guarantee of future results. How can you be confident that the market will, in fact, recover from the next downturn? Specifically, how can you know that you’ll be in good shape if you’ve set aside the five years of portfolio withdrawals that I’ve recommended?

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We Knew This Would Happen

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