Preparing For “What-Ifs”

Preparing For “What-Ifs”

We are now a little more than two months out from the bear market lows. As the swift recovery ensued, I started hearing stories of investors who sold out of their portfolios around DJIA 19,000 “because the market was going lower.” They were right for the blink of an eye. With the market now back above 26,000, when are those investors supposed to get back in? I have to pose the question because getting back in is always the hardest part. In order to do so, they have to admit to themselves that they were wrong and we never like to acknowledge that.

Regular readers of this site know that I am an eternal optimist. Or as I like to say, a realist since optimism is the only perspective that squares with the historical record. The entirety of our investing lives says we should continue to be optimistic right now and always, but I do think it’s important to ask yourself the question, “What if?” when thinking about your current portfolio.

What if the aftereffects of the COVID-19 economic shutdown causes a secondary dip along the lines of 2008? What if the trillions that have been pumped into our economy results in a hyperinflationary period similar to the 1970s? There is value in discussing the absolute worst-case scenario.

The “what if” part of the question is important because we cannot assume any of these possibilities will come to fruition. Predicting is easy. Being right is rare.

Let’s take the hyperinflation argument as our example. It is almost too easy to forecast a period of hyperinflation given the trillions the Fed has printed so far. But let’s not forget that folks were forecasting hyperinflation during QE1-QE4 and not only did hyperinflation NOT occur, but we have enjoyed more than a decade of historically low inflation. It could happen this time, though it may not.

I don’t believe that any opinion you hear on TV should cause you to make any changes to your portfolio unless it already needed work before COVID turned the world upside down.

What’s important at the moment is that the market has offered us a bit of a reprieve here. It’s hasn’t fully recovered yet but darn near. It’s close enough that if you needed to make portfolio changes beforehand, now may be an opportune time.

How can you prepare yourself for a variety of possibilities?

When it comes to preparing for the what-ifs, perhaps it’s time to conduct a lifeboat drill on your retirement portfolio. Go back to the post on how to rethink risk in retirement – if the worst-case scenario unfolds from here, how many years’ worth of your desired income do you have set aside in cash and government bonds/TIPS?

My hope here is not to sway you to do anything as I am not prognosticating. It might be just as important that you prepare for the possibility that once this passes and the supply chains catch up that there could be significant pent-up demand causing a major market upside surprise. We don’t know. We can’t know. But we can be prepared.

Here are two things I do know – just about all the successful investors I know purposefully act on a plan and just about all the failed investors I know react to current events that are almost certainly advertised as the end of the world as we know it.

Take this market reprieve as an opportunity to revisit your plan. When is the last time you updated your written retirement income plan? Is your portfolio specifically designed to get you through a 30-year retirement? To best prepare for the what-ifs that lie ahead, make sure your plan and portfolio are aligned. Now seems like a great time to check it off your list.

Lastly, in case you missed them, I do believe that the last two posts are worth revisiting as I believe them to be just what the doctor ordered when it comes to viewing bear markets through a long-term lens. Here they are again.


This post is not advice. Please see additional disclaimers.


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