Plan For the Tough Times While We are Still in the Good Times!

Expert Contribution by Brian McGeough, Chatham Wealth Management

Recency bias is a concept where investors believe that recent data is more important than historical data. This may be true in many cases when you are looking at individual investments, but when you look at the total investing environment, this could prove to be a devasting mistake when managing your investments.

Currently the S&P 500 is in an historically long bull run (over 10 years!). The total return of the S&P 500 is up an average of 14.25% per year since March of 2009 (the end of the great recession) to today. The average total return of the S&P 500 since 1900 is +9.8% per year. The per year return since 2009 is 45% greater than the long-term average. When you see this type of outperformance a reversion to the mean is not uncommon.

People often fall into the trap of looking at the current situation and assuming that this will go on forever….recency bias. Investors in the late 1990’s were so caught up in the internet bubble that they ignored the warning signs such as companies that were losing massive amounts of money each year but the stocks were making new highs every day. Combined with new/ made up ways of valuing these stocks. Back then, a “multiple of eye balls” was one way Wall Street analysts justified high prices of internet stocks that lost millions of dollars a year (yes, this sounds made up, but it was really a thing during the dot com boom). The end result was disastrous for investors that did not have a solid financial and investing plan AND the discipline to stick with the plan.

The best advice we can give to our clients is to plan for the tough times while we are still in the good times.

1) Create an emergency fund that is accessible and liquid so if you hit an unexpected bump in the road you can weather the situation without having to sell investments at a bad time in the market.

2) Diversify your portfolio. Putting together a portfolio with an income component from dividends and interest is a great way to make sure you still have money coming in if something happens to your main source of income. Even if the investments in the portfolio go down in value, the income will continue to come into the account.

3) Create a long-term plan now.

When tough times hit many things in your life can turn bad at the same time. The economy slows resulting in lower income or losing a job while the market declines and the value of your house takes a hit. While at the same time, your costs are NOT going down! Planning for your future financial needs during the good times will help you play offense during the bad times as opposed to always being on the defensive when things turn south.

At Chatham Wealth Management we work with clients to create, implement and monitor a long-term financial plan and we manage their investments to work toward reaching their life goals. Please visit our website at www. chathamwealth.com or call 800-472-8086 if you would like to meet for a complimentary portfolio review and discuss your financial plan.