Are You Prepared to Experience a Potential Demise of the Bull Market?
We are in the midst of our country’s second longest (consecutive month) bull market. Given the current trend, we will set the record for the longest ever bull market in August 2018. Despite this trend, several analysts are predicting that we are nearing the end of the run and may begin to experience a significant correction with higher interest rates, inflation and increased volatility.
Whether an end to the bull market comes today or next year, ensuring that our clients are prepared for a pull back or market correction is a top priority.
From 2007-2009, the U.S. experienced an unprecedented recession. While we are not necessarily predicting a repeat, in that time period, the S&P saw a decline of nearly 50%. For many investors, it was a time to panic and sell out of the market. However, Collins Investment Group’s clients that developed an investment strategy with our team had the confidence to “stay the course” which led to an opportunity to continue growing their wealth over time.
Every market cycle is going to be different from the last, but there are investing strategies which can prove helpful in several scenarios. As a client of Collins Investment Group, these strategies are something that we have continued to emphasize – proper asset allocation and income producing securities.
Proper asset allocation is critical to your portfolio management because it can help mitigate the risk from underperforming sectors or securities, and help you navigate the ebbs and flows of the market. Remember, winners will not necessarily stay winners in any given period of time. Being proactive versus reactionary to market conditions is something that we strongly encourage for all of our clients. As we explained in our April 2018 Newsletter, a prolonged bull market can create investor euphoria and lead to disproportionate growth in equities. In turn, you may end up with higher risk than you had originally desired. Periodically rebalancing
your portfolio helps us maintain the desired level of market risk and ensures that your allocation remains consistent with your goals. Continuing open and honest discussions with our team about the level of risk that you can sustain will be important to ensuring that we can continue to invest your portfolios in a way that suit your needs.
Another foundational investment principle at Collins Investment Group revolves around cash flow, or income producing securities. Finding healthy, established companies with a history of a strong, growing dividend over time has proven to be a solid strategy for both clients with income needs and for those looking for total return. Of course, nothing is guaranteed and always subject to change, but even in the great recession, many of those companies as described above continued to pay dividends even though the stock prices may have been significantly reduced. Simply stated, shareholders were paid to wait for the stock prices to return.
For those investors with income needs, it meant that they could continue to live off of their income without dipping into principal — “Rule number one; don’t touch the principal. Rule number two; don’t forget rule number one.” For our clients that were investing for total return, they could continue to reinvest their dividends to compound their growth over time.
As an example of how dividends can fortify your portfolio, in the period January 2007 to June 2018, the S&P 500 annualized return was 5.92% before the dividend and 8.10% after the dividend. This translates to a 92.87% versus 143.40% total return, respectively.
Eventually, we will see a pullback in the stock market and be presented with more volatility and uncertainty. However, we believe that with proper asset allocation and a dividend strategy for income or total return, we can help you sleep soundly at night. We proactively connect with our clients to ensure that their portfolio strategies remain in line with their risk tolerance, but if anything has changed for you whether it’s a life event or even a nervous feeling, please feel to reach out to schedule a call or meeting.