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Remain Calm When Riding Out the Market Storm

Written by Tim Decker, AIF®. Posted in Central Penn Business Journal

Storm-Dog

Last fall, the stock market was highly volatile, with share prices shooting up and down. This year, this volatility turned into consistent loss, and the market was down substantially as of mid-February: Indeed, the Dow Jones Industrial Average was down nearly 13 percent from its record in May of last year.

Some pundits see this as a prelude to a bear market (defined as a 20 percent drop) while others say the overall decline will go no further than a correction (defined as a decline of at least 10 percent). As of Feb. 10, the S&P 500 was down for the year by 9 percent.

This is a sharp departure from the bull market that ran hard from 2009 through 2014, and a downturn from the market's more or less flat performance in 2015. Many investors regard the market's performance so far this year as bad news, yet they curiously act as though they'd never expected it to happen—despite common knowledge of the market's long history of doing just that.

This is simply what the stock market does. Ultimately, what goes up will come down. There's no such thing as an ever-ascending market. If there were, investing would be a sure thing.

Most investors who panic and sell when the market declines know this, of course, but they sell anyway. This panic stems from their failure to remember that previous declines, such as the deep one when the market melted down in 2008, will repeat themselves. How soon they forget, and how soon they get complacent and too comfortable in bull markets. This comfort can be a liability because it sets up undisciplined investors to overreact when things get rough.

Many investors see the market's current state as such bad news that they must do something about it. So, consumed by fear, they are compelled to sell their stock holdings, often for much less than they paid for them. This is all too common and all too misguided. And in this situation, they probably shouldn't do anything. That's right. The answer is: They should probably do nothing, leaving their investments alone and giving them a chance to rise in value.

Nothing is a tough thing for most people to do, but that's usually the best choice when the market declines, whether it's a precipitous decline or a herky-jerky one. But when the line on the graph is headed downward, it's tough to keep a level head and remember the wisdom of sticking to your plan.

This plan should constructively anticipate declines by calling for your portfolio's assets to be spread over different assets that don't tend to move in the same direction. For example, bonds have historically tended not to decline when stocks do, so bond holdings can usually buoy a portfolio's total value when stocks fall. Sure, you won't make as much money on stocks in good years if you've been parking money in bonds instead and bonds don't do well. But this portfolio diversification reduces risk, helping to protect you from big hits, likely increasing your long-term average returns.

This is a time-honored strategy used by wise, long-term investors, helping them make it to retirement with the least damage and, thus, better overall returns. Like these people, you should probably deal with these declines in advance by creating a sound plan for asset allocation that accounts for income, goals and risk tolerance. This plan for investing should be carefully assembled—like a blueprint for a house. And as with a house, the sounder the plan, the sounder the portfolio.

This takes a rare quality in any endeavor: discipline. You can't do anything about the market, but you can do something about yourself. If you don't have a plan, get one, and resolve to stick to it with discipline when the market tanks. This is the way to ride out market storms, avoiding panic and rash moves.


 

This content is based upon information believed to be accurate by ISI Financial Group, Inc. However, it should not be relied upon for legal or accounting purposes. You should always use the custodian's brokerage statements as an accurate reflection of your portfolio. Past performance is not indicative of future performance. Investments involve risk, including the possible loss of principal. Always seek professional advice before making any financial or legal decisions.

As they age, many people naturally begin to focus on their wills. While planning your bequests is always a good idea, people often overlook a crucial option: Instead of using a simple will, use a will with a built-in trust.

In many cases, with the guidance of a qualified attorney, a trust can be more effective than a simple will in achieving your estate goals, and provides far more flexibility for changing life circumstances. The provision in wills that does this is called a testamentary trust. You can’t incorporate these into a simple will. Instead, you need what’s known as a normal will.

Life itself and your future are uncertain—especially after your death, when you no longer have any say in what you’ve left your loved ones. Simple wills can be inadequate for addressing the unanticipated because upon your demise, all of your assets are distributed outright, with no further stipulations. Situations may develop in the lives of your survivors that could thwart your ultimate goals.

A normal will with a testamentary trust built in can help you deal with the unexpected, and gear your bequests accordingly. A trust is considered a living entity. In contrast to a living trust, established while you’re alive, a testamentary trust is funded by your estate, with a set of instructions and conditions on who gets what, when they get it and, sometimes, what they can do with the money.

The beauty of trusts is that they can be far more configurable than simple wills. A trust can do precisely what you prescribe in the language of its governing document. Trusts name a trustee, or co-trustees, who are usually trusted individuals or professionals, to administer and follow the instructions of the document.

Trusts can be used to address various scenarios. These include:

·         The possibility that your spouse may remarry after you die. Let’s say you have a simple will that leaves everything to your spouse, who then creates a simple will that leaves everything to her or his second spouse. Then, if your spouse dies before the new spouse, the surviving spouse may leave everything to children from a first marriage. So, the unintended consequence of your simple will might be to start a chain of events that results in your own children being cut completely out of their inheritance. Other events, such as a divorce by your surviving spouse, could also claim assets you left to your heirs. A trust can help prevent this. For example, a trust could be set up to give your spouse regular access to money in your estate—as much as he or she wants—while providing that upon his or her death, your children get what’s left. In such cases, you could make your spouse the trustee, provided that she or he can handle money well. If not, you could appoint someone else as trustee, or co-trustee, who could oversee the payout of regular disbursements to your spouse in keeping with the trust’s provisions.

·         The unfortunate reality that sometimes, because of drug, alcohol, psychological or other problems, some of your heirs may have poor judgment that would prevent them from managing their inheritance wisely. Again, regular disbursements administered by a responsible trustee might be the solution, while helping protect assets as well.

·         The possibility that young beneficiaries might be financially irresponsible. Let’s say that you want to leave money directly to your children or grandchildren. But when you die they’re just not able to handle money wisely. Your trust can determine what they get, when they get it and what purposes they may use it for—for example, paying for college or medical care not covered by insurance—until they reach a certain age.

So, before you automatically decide on a simple will, consider your values, goals and family situation. Then discuss this with a qualified estate planning attorney to see how a trust might best fulfill your will’s goals.