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Being "Greedy" When Others Are "Fearful" Intentional Actions to Take Advantage of Volatility

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While periods of market turbulence are stressful, history has demonstrated that making investments during these periods is profit maximizing, in the long term. Warren Buffet says “Be greedy when others are fearful, be fearful when others are greedy” This sounds great, but often the circumstance surrounding the disruption paralyze us.  Outside of just buying equities what are some concrete actions we can take to increase our “greed” in periods of “fear”?

  • If you are making monthly equity market contributions to non-retirement accounts (a strategy we strongly endorse) increase those contributions as much as you can and use the funds to buy a broad-based equity index. This is a great tool for systematic incrementalism. Many models had been predicting 0-3% annualized returns in equities over the next 10 years from recent market highs. Those same models are now predicting 5-8% returns. Just like when we buy more bread at the grocery store when it's on sale we should buy more equities when they are on sale.
  • Paying for college – The tax code allows you to make up to 5 years of contributions to a 529 College Savings Plan in a lump sum while amortizing those gifts over 5 years. In practical terms, this means you can make $75k in contributions in a lump sum and then report that amount as separate $15k contributions each year keeping you below gift tax caps. This is an excellent time to consider a contribution like this for children or grandchildren. Given that this money likely has time horizon greater than 5 years these valuations should add an extra kick to the long-term value of these contributions.
  • Asset Allocation Review – Most bond sectors have done what they are supposed to do during an equity draw-down, provide a hedge and cushion the blow. However, with short term interest rates now near zero and ten year rates around .75% bonds don’t look attractive in the short or long term. At the very least, make sure you re-balance your stocks and bonds in your 401k by selling bond funds and buying equity funds. For people more than 5 years away from retirement increase your equity exposure.
  • Refinance Your Mortgage – Long term mortgage rates are sub 3.5%. Anybody who has a rate higher than 4% should consider refinancing. You should also consider moving from 30Yr to a 15Yr mortgage. Your rate and payment may be similar to your current payment, but you will benefit from huge savings on interest over the life of the loan
  • Credit Card Debt – If you have credit card debt call your provider and ask for a lower rate
  • Consider non correlated alternative investments – We have been huge proponents of investments with returns that are not dependent on the economic or interest rate cycle. Many of these have been ignored as the equity market has moved relentlessly higher. With interest rates likely “lower for longer” these vehicles, generating 5-10% returns with bond like volatility, look very attractive.
  • Talk to your adviser about establishing a formal financial plan. We have seen much less distress in our clients who have a long term financial plan in place. These clients understand that their plan is based on long term equity returns which include expectations that equity markets will experience periodic severe draw-downs. Knowing that their plan accounts for these events gives them the ability to avoid irrational decisions.