Safety: Instincts, Forecasts, Logic
From my perspective in December of 2007, 2008 would be problematic. I was approaching retirement. Real Estate prices had reached a peak and the stock markets, which were well up, were now showing increased volatility as several sectors were showing uncertainty. The Bush Tax cuts returned the US to deficit spending from the surpluses amassed during the previous administration. Collateralized debt, a major source of capital, fees, and profits began to dry up when inflated real estate values began to decline. There would be Presidential Elections in November. No matter what I heard or which forecast I'd read not one source suggested very high growth, on average 4-6% for 2008. Long term investors were being assured of the economy's and markets' long-term prospects even with slower growth. Investors continued taking distributions and portfolios were not reallocated to compensate for increasing volatility
I took a major beating in the 2001-2002 tech crash and took everything left out of the market vowing that mistake would not reoccur. I reentered the market in 2003 and saw my investments grow by January 2008 restoring the account to a small but meaningful amount for me. In March 2008 there were several setbacks in the financial industry that previously had done well. I was convinced that the benefits of remaining in the market, a 6%-8%upside, simply was not worth the downside risk, (-20%) and I liquidated everything and in June wrote colleagues of my decision, advising substantial reductions in market exposure based upon a single principal, the upside in the market was not worth the downside risk. Today, the same principal applies. Is the potential reward worth the downside risk?
I got back into the markets just after the Dow fell below 8,000 with about 15% of my savings and by 2014 had seen exceptional performance. I was planning to build or purchase a retirement house in 2015 made possible in part by my portfolio's growth. I knew I would not be needing funds until the Fall, but the account was essential to meet expected outlays over the next 18 months. I cashed out everything again, not because of market conditions, but because, I knew I needed to preserve the asset for future needs. In fact the markets corrected in the Aug 2015 and did not fully recover until April 2016, the period the house was in construction.
A few days ago, on January 31, 2018, I suggested that for many late-term investors, the short-term risks of the market warrant re-positioning investments regardless of longevity expectation. The impact of short term market corrections can be devastating for retirement accounts and yesterday's market correction should be seen as a clear warning that Late-Term investors need to prepare. If your Instincts tell you to worry while the Forecasts tell you not to worry, just use your Logic and start reducing risk exposure.