Letting Breadcrumbs Guide You Through Volatile Markets

Whiplash. We’ve gone from giddy highs to endless freefalls in sixty days. And it’s come totally out of the blue.

When the new year began, there were concerns about financial markets being overvalued. Stock markets would continue to grow to record highs, after rising nearly 20% from their October 2019 lows. Most financial and investment advisors like, HCR Wealth Advisors, had already gone relatively conservative in their asset allocations in clients’ portfolios.

But Coronavirus? That wasn’t on anyone’s radar. Yet the volatility it has since provoked — based mainly on uncertainty — has become a source of generalized stress and anxiety.

Premier stocks like Apple issued warnings that they would miss revenue forecasts because of manufacturing delays. Factory closings in China virtually shut down its economy, thus ensuring supply chain disruptions and inventory stockouts in the U.S.

And we haven’t even factored in the concerns over the dangers of the disease itself. Our sense of normalcy has been severely shaken. Anyone watching the markets over the past few weeks (since “COVID-19” became a household word) has suffered repeated bouts of whiplash.

How does that affect you, the individual investor, though? If most of your savings are sitting in IRAs and 401(k)s — supposedly growing safely in the background — you’re watching their value seesaw madly.

You may have a financial advisor like HCR Wealth Advisors, with whom you have locked down a safer long-term investment plan. Still, it may be hard to ignore the conflicting comments experts have made. Every online and cable outlet screams the latest market movement, so it wouldn’t be surprising if you felt moments of doubt or concern.

What Extreme Market Volatility Looks Like

In early February, as the potential market risk of Coronavirus was taking hold of our consciousness, noted economist and Allianz’s chief economic advisor, Mohamed El-Erian said the virus was “a fundamental shock to economic growth in China” and would overcome the U.S.’s positive market sentiment. His recommendation after a 603-point dip in late January was to resist the inclination to buy any dips related to China.

Towards late February, all three markets — the Dow Jones Industrial Average, S&P 500, and Nasdaq — had fallen over 10% from the recent 52-week high. They had suffered a textbook correction. Something had spooked investors out of stocks and into the traditional safe havens.

For five straight days, markets tanked over concerns about the unknown impact of COVID-19. By the end of February, all three were down more than 12%, but not without periodic upswings to highlight the volatility.

But let’s put things in perspective. There have now been 27 market corrections since World War II. They typically involve nearly 13% declines and bounce back somewhere around four months later.

But if this were to turn into a bear market — which is a 20% decline — CNBC says there have been just 12 since World War II. They averaged a 32.5% decline, typically last 14.5 months, and take two years for a full recovery.

As HCR Wealth Advisors points out, though: SARS, H1N1 (swine flu), and Ebola all had scary headlines and dire projections. But they ultimately passed and, in hindsight, provided future buying opportunities to clients.

What Financial Expert Should You Believe?

Nonetheless, this decline was the fastest in history and — as expected — panic followed. Many were looking to experts for orientation on what to do.

And now, 30 days from his last recommendation, Allianz’s Mohamed El-Erian has changed his tune. Now he sees some good picks for professional short-term tactical investors, although not for unsophisticated, long-term investors.

There is no clear consensus. But if you have someone like HCR Wealth Advisors standing by your side to answer questions, it will help.

The Path Forward in Likely Volatility

You and your trusted financial advisor may agree to ride things out. Or, if you trade on your own, you may feel the waters are too turbulent to jump in. In either case, you’re going to witness your portfolio swing up and down, at least until it the market finally bottoms, rebounds, and stabilizes. And the closer you are to retirement, the more those swings are going to worry you.

What can you do to make day-to-day life less stressful as you wait for a return to normalcy? Change your perspective. Don’t focus exclusively on the ups and downs of your portfolio. Instead, look at it within the context of your net worth, where your other assets provide some stability.

As part of their service, financial advisory companies like HCR Wealth Advisors feel a duty to educate and empower clients, providing them with the knowledge to sleep well at night. Defining and monitoring clients’ net worth is a small part of that.

But, as an investor in turbulent times, there is added value in you taking one more step: calculate your own net worth and do it with whatever frequency brings you peace of mind.

Why would that help? Regardless of how much of your retirement nest egg is made up of at-risk assets, your other assets will help buffer the ride. It is reassuring to see your stock portfolio resting on a foundation of cash, home equity, and other stable assets.

As you update your net worth regularly and the numbers go up and down — especially when they go down — you will be creating a trail of ‘breadcrumbs.’ Once the China-born disruption has ceased, the world catches its breath, and our economy starts coming back to normal, you will recognize the path back up to your original position of January 2020.

(Breadcrumbs may not have helped Hansel and Gretel find their way back home in the Brothers Grimm fairy tale, but they will make your path back feel far more familiar.)

How to Calculate Your Net Worth

Let’s start with a definition: net worth is “what you own minus what you owe.” In financial terms, it equals all of your assets, minus all of your liabilities. If the result of that calculation is a positive number, you have a positive net worth. If it is negative, you have a negative net worth.

Calculating your net worth, especially if you do it regularly, lets you measure any changes over each period, whether it’s monthly, quarterly, or annually.

And it isn’t hard to do. Whether you use one of the many online apps or an Excel spreadsheet, you follow the same process.

First, you gather all relevant documents, ideally covering up to the same date. That could be December 31 for the year. Or the last day of a month or quarter. The process can be simplified if you use online apps that connect to your brokerage, IRA, and 401(k) accounts.

Your goal is to build your list of assets, together with their values (or estimated resale values). Your list could include:

  • Cash (in banks, money market accounts or CDs)
  • All of your investments (balances in retirement accounts, mutual funds or individual securities)
  • Your home and real estate investments
  • Cars
  • Personal property (electronics, jewelry or household items)
  • Other assets

To build your list of liabilities, you’ll need the balances on:

  • Credit cards
  • Student loans
  • Car loans
  • Mortgages and equity loans
  • Medical bills
  • Other personal loans

Your liabilities will be easy to calculate because they will each have a number assigned to them. They are not subjective.

Some assets, such as physical gold, can be valued at published market ‘buy’ prices.

Other assets — like any real estate, cars, and personal property — might be a little less straightforward. Real estate, for example, should reflect the sale of a comparable house in your neighborhood. (Zillow is a useful tool for that.) For your cars, Kelly Blue Book or CarGuru can help.

If you have valuable jewelry, it should probably be appraised, and all electronics and household items would reflect how much cash you could get for them if you sold them. Be realistic. Most of us overvalue what we own.

If you haven’t done it before, the first time you calculate your net worth will take the most time. After that, you will likely just be pulling balances off documents.

But even if your more subjective valuations — such as your grandmother’s diamond-and-platinum engagement ring or your unrestored 1957 Ford Thunderbird — are not exact, estimate the best you can. The key is to keep your valuations steady unless they genuinely change in worth. (You’re looking to compare one month or quarter with another, not to introduce any unnecessary inconsistency.)

The three steps are simple:

  1. Add up the value of your assets.
  2. Add up the value of your liabilities.
  3. Subtract your total liabilities from your total assets.

Now you have your net worth on the chosen date.

What Your Net Worth Analysis Won’t Do

The result of that calculation holds no judgment and is simply the snapshot of a moment in time. It is the consequence of all your decisions in the past. And, if you are not content with the outcome, you have the power to change your choices in the future.

As HCR Wealth Advisors says, “Every client walks a unique path in life.” But net worth generally follows a typical trendline over time. It is flat from childhood through your teens, since you have no real financial activity.

Then, when you are in early adulthood with a starting salary, you may be carrying school loans and taking out a mortgage to buy a house. Your net worth will be negative. But then you start earning more, pay off your loans, and begin to build equity in your home by paying down your mortgage. Soon your net worth will go positive.

And from there, it will ideally build until you reach your targeted net worth as you prepare for retirement.

Your net worth is a convenient measuring stick. It is useful for measuring progress — and for our exercise today. But it does not determine the nature of your assets or if they are correctly diversified for retirement, for example.

HCR Wealth Advisors will delve into the actual composition of your assets. As a personalized service, your unique time horizon will determine your investment goals and the tools you will use to achieve them.

Stocks and most funds, for example, carry more risk than bonds or fixed-income instruments. But as an investor, you are rewarded for taking a risk, and that’s what grows your nest egg. Risk plays an important role early in your financial journey.

Yet, as you approach retirement, you will likely want to lower that risk, as you have less time ahead to recuperate from any losses.

You’ll want a specific portion of your assets to include lifetime sources of income. Also, other forms of assets that offer the means to minimize your tax burden in retirement.

That is a different discussion.

For now, our interest in net worth is not qualitative; it is quantitative. Our focus is on how you can use your net worth calculations to help navigate the volatility of the markets.

What Your Net Worth Analysis Will Do

By calculating your net worth each month, for example, you will be aware of the impact of fluctuating markets on your overall accumulation of assets. Rather than imagining how bad things are, you will know exactly where you stand. And knowing is always better than not knowing.

As COVID-19 evolves, however it does, it will continue to affect industries that cannot source parts and ingredients coming from compromised markets. Production and logistics will break down. And the financial markets will fluctuate with every piece of news.

The human cost will evolve, as well. The illness itself is still poorly defined. Demand in different segments will drop as people change behaviors, even stay at home for protection. Jobs may be lost or restructured.

Right now, the trajectory of each element is unknown, and speculation is rampant. And each aspect will influence the markets, driving them up and down, and eventually up again.

By having the discipline to calculate your net worth regularly, you will be able to monitor the effect of the markets on your net worth. But once the negative impact is over and normalcy returns, markets will also return. Best of all, you will have the benefit of watching your net worth retrace its steps back out of volatility, following the breadcrumbs you left, hopefully back to the highs of January 2020.

HCR Wealth Advisors uses a financial management framework called The Clarity Formula™, which is a comprehensive, transparent, and highly customizable map of a client’s financial journey. Whether you can avail yourself of such a framework or not, net worth breadcrumbs will serve you well as you travel through the next few months of unchartered downs and ups.

Originally published at https://www.bestfinance-blog.com on March 11, 2020.

*This article is for informational purposes only and should not be considered investment advice.