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.
Information presented should not be considered specific tax, legal, or investment advice. You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.
Different types of investments and/or investment strategies involve varying levels of risk, and there can be no assurance that any specific investment or investment strategy (including the investments purchased and/or investment strategies devised by LCG) will be either suitable or profitable for a client's or prospective client's portfolio, thus, investments may result in a loss of principal. Accordingly, no client or prospective client should assume that the presentation (or any component thereof) serves as the receipt of, or a substitute for, personalized advice from LCG or from any other investment professional.
Fixed indexed annuities are complex, long-term investments designed for retirement purposes. Guarantees are based on the claims paying ability of the issuer subject to their terms and conditions. Generally returns are based on a market index and are limited such that an investor does not fully participate in market performance. Withdrawals may be subject to surrender penalties or foregoing benefits if withdrawn prior to the contract term. Withdrawals prior to age 59 1/2 may be subject to a 10% penalty tax in addition to income tax. Annuities are not FDIC insured. Certain terms and conditions apply, so please read insurance company materials carefully.
Treasury securities are backed by full faith and credit of the U. S. Government but are subject to inflation risk.
CD’s are FDIC insured up to $250,000 per depositor, per insured bank, for each account ownership category.
Raymond J. Lucia Jr. is chairman of Lucia Capital Group, a registered investment advisor, and CEO of its affiliated broker/dealer, Lucia Securities, LLC, member FINRA/SIPC. Registration with the SEC does not imply a certain level of skill or training. Advisory services offered through Lucia Capital Group. Securities offered through Lucia Securities, LLC.