Waiting Patiently for the Other Shoe to Drop...

Over the past handful of weeks, we've found ourselves having conversations with everybody from our doorman to the meter maid about what investors should do in the face of a government shutdown and a potential default by the US.

Our response is that investors, now more than ever, need to stick with their investment discipline. The fact of the matter is that the capital markets have faced crisis after crisis over the years and continue to recover to reach new all-time highs. We do not expect this time to be any different.

While we agree that there is plenty to be afraid of, and we are likely to see plenty of volatility in the coming weeks, we need to recognize that accurately forecasting the timing of market moves is a loser's game. As Warren Buffett has noted, a main cause of the failure to earn market returns is "a start-and-stop approach to the market marked by untimely entries (after an advance has been long underway) and exits (after periods of stagnation or decline)."

Rather than focus on factors that we cannot control, investors should be focused on what they can control:

1. Having an appropriate level of risk. If you are retired and living off your investments, you probably shouldn't have more than 60% of your investable assets in the stock market. By owning a healthy percentage of less risky assets, you are essentially bankrolling your income for the next handful of years. This gives the balance of your assets plenty of time to recover after the next inevitable bear market.
2. Maximize your diversification. Not only should investors have an appropriate mix of stocks and bonds, but they should also have maximum diversification within those asset categories. For example, we do not suggest the investor own only the 30 stocks that comprise the Dow. We advocate that investors hold a globally diversified equity portfolio with exposure to over 10,000 stocks worldwide. However, diversification isn't just for stocks. Bond investors should own bonds offered by various issuers with various maturities from various countries.
3. Be ready to rebalance exactly when you don't want to. We can actually profit from the volatility of the markets by rebalancing when an asset class is in distress. If the US stock market drops 25%, investors should be excited to get the same stocks they loved a year ago at a 25% discount. Rebalancing, by definition, has us doing exactly what we know we should be doing but usually don't want to do when the time comes - buy low and sell high.

The good news is that if you are reading this you are a Denver Money Manager client and all of this is already built into your investment discipline.  We will continue to stay on top of the markets and your plan so you don't have to.

As always, we are available to talk about this or anything else in your financial life.

You know where to find us.