Skeels Cygan: Investors need to prepare for chaos

Uncertainty is always present. It impacts our health, our family and friends, and our investments. We can control many factors involving our finances — such as our saving and spending, maintaining an emergency fund and avoiding credit card debt. But we can’t control the stock and bond markets. Lately, the chaos feels much greater than normal.

The situation in Washington feels turbulent. As I write this on Feb. 24, many U.S. government workers don’t know if they have jobs. Many countries in Europe are facing economic turmoil, and parts of the Middle East feel like they are ready to implode. The folks near Los Angeles who lost their homes in the January fires likely feel more uncertainty and chaos than we feel in New Mexico, but no one knows what natural disaster — or act of aggression — may happen next.

Investors like steady, positive returns. The U.S. stock market often reacts negatively to chaos, although it has been amazingly — or, should I say, eerily — calm in recent months. The S&P 500 has averaged an 11% return over the past 10 years. Some experts predict low returns over the next 10 years, but no one knows for sure.

How can you prepare?

The best thing you can do is follow your plan and manage your money wisely. This may seem simple, but it requires that you have a plan (many do not), and that you manage your investments rather than neglect them in prosperous times.

Let’s focus on these two issues:

What is your financial plan?

• What are your goals? Write them down.
• Make certain you have an emergency fund that would cover up to six months of expenses, and keep it in a money market fund or bank account that is providing you with an attractive yield.
• What is the asset allocation you want to maintain in your investment accounts? The standard asset allocation (endorsed broadly by the financial industry) has been 60% equities and 40% fixed income for many years. They term this a balanced portfolio, and it typically performs well. However, a lower equity percentage is often recommended, especially for retirees or persons with less tolerance for loss. So, what’s best for you, your family and your goals?

As you create your financial plan, be aware that investors have many biases that interfere with making wise decisions. One of the strongest is called “recency bias.” This is a tendency to, often unconsciously, place more emphasis on recent experiences rather than on pertinent events that occurred further in our past. Humans tend to have short attention spans, and this can negatively impact our investment decisions.

The S&P 500 declined 18% in 2022, but it increased 24% in 2023 and 23% in 2024. It seems reasonable that we would remember the positive returns of the past two years and assume the future returns will be positive.

However, I would argue that an investor should remember the S&P declined 54% between October 2007 and March 2009. During the 2008 financial crisis many people lost their jobs and their homes, and the U.S. economy was in a total meltdown. The U.S. government doled out $700 billion in a bailout program called the Troubled Asset Relief Program.

Is it reasonable that we could experience something similar to the 2008 financial crisis again? Mark Twain famously said, “History doesn’t repeat itself, but it often rhymes.”

Manage your investment accounts

• Have you reviewed your investment accounts during the past six months? Spring is a great time to “weed your garden” and clean up your investment accounts. Sell investments that no longer feel appropriate for you, reduce your expenses inside your accounts and move to index-like assets in taxable accounts to keep expenses low and be more tax-efficient. If your accounts do not match the asset allocation you have chosen, rebalance them. Consolidate investment accounts where possible, and simplify your investments.
• Are you funding your retirement accounts automatically if you are not retired? Set up automatic contributions as high as you can afford. If your employer offers a Roth 401(k) or 403(b), use the Roth version. It will not give you an immediate tax break like a traditional 401(k) or 403(b) will, but it will save you taxes in the long run. Are you funding a Roth IRA outside of your employer’s retirement fund if you qualify? Save as much as possible in a taxable investment account. A taxable account is valuable as an alternative to only saving in retirement accounts.

Managing your investments will be easier if you educate yourself on financial topics. Consider the following books: “How to Retire,” by Christine Benz; “The Four Pillars of Investing,” by William Bernstein; and “The Psychology of Money,” by Morgan Housel.

If the U.S. stock market remains calm and favorable for the next 10 to 20 years, all investors will be thrilled. However, if it becomes turbulent next month or next year, you will be better prepared if you take the above steps. Investors are never guaranteed a smooth ride.