These Crazy Markets

If you’ve ever lived through a big storm, you probably know that the time to defend yourself is before the event happens. Along those same lines, being prepared for unavoidable market downturns means setting yourself up while the skies are clear—because storm clouds can come on pretty quickly.

The past several days have seen a lot of market turmoil, and there are a number of different causes, not the least of which is U.S. Treasury yields hitting multi-year highs. This has caused some “agita” among equity investors, and last week it created a couple of the sharpest two-day retreats in equities that we’ve seen in months.

You’ve also got trade wars, high stock market valuations, and maybe some slowing of growth in international markets.

So this begs the question: What can you do about it?

Well, if you’ve been following us for any length of time, you know we’re going to tell you that you’ve got to have a strategy—a Bucket Strategy.

The Bucket Strategy® helps you allocate your portfolio into short-term, mid-term, and long-term buckets. The short-term bucket provides you with a portion of your portfolio that you can use for current needs, while your mid-term bucket is allocated to investments intended to replenish your short-term needs bucket or to take opportunistic plays and invest into the long-term portion. The long-term bucket is where you invest with a time horizon of 10 years and beyond.

So, given all this market volatility and how long we’ve seen this bull market run, what should you do now with your Bucket Strategy?

We believe that right now you should be considering taking some money from your equity or long-term bucket and building up a nice, healthy Bucket 2. Bucket 2 is really the core part of the overall Bucket Strategy.

So the that begs another question: How should you be investing your Bucket 2 today?

Typically speaking, for Bucket 2, investors usually prefer a balanced allocation of stocks and bonds (like a 60/40 mix). The problem with this practice is rising interest rates. We’re seeing some pullback in bond valuations, which can be a drag on a portfolio’s overall performance, while at the same time stock market valuations are close to all-time highs. You’ve got to have some liquidity, but you may consider adding some principal protection strategies inside your Bucket 2.

For this reason, we suggest looking into a trigger index strategy. With a trigger index strategy, if the index is positive at the end of the measuring period—any positive movement—you’ll get the trigger rate of return for that year. If the index is negative, your principal is guaranteed and you will not lose any money.

Along with a trigger index strategy, you might also consider other principal guarantees to complement your Bucket 2, like certificates of deposit or even multi-year guaranteed fixed-rate annuities.

It might help you visualize this by thinking of your Bucket 2 as a ladder. The higher up the ladder you are, the more risk you might be taking. Those 60/40 balanced portfolios might be closer to the top of that ladder (remember that back in the Great Recession, balanced portfolios fell roughly 30%), whereas principal-guaranteed strategies are right near the bottom. It’s up to you how far you’re willing to potentially fall in a market downturn.

Overall, you want to consider building up your Bucket 2 and reducing your Bucket 3 in order to give yourself the opportunity to buy low (with hopes of selling high in the future) in the case of a market pullback.