By Taylor Sutherland

Here we sit, a solid 10 years after the Great Financial Crisis. We’ve been the beneficiaries of the longest-duration economic expansion in modern history. Now, many investors and investment pundits are beginning to forecast impending doom and another “Great Recession.”

They’re right: Winter is coming.

Whether you’re a Game of Thrones watcher or not, you know what winter’s coming means. Investors are looking at their portfolios, still ringing from last quarter’s stock market drubbing, and wondering what’s coming next. Yield curves are inverting; leading economic indicators are softening here and overseas; and there’s a fair amount of trash talk between the U.S. and its trading partners.

Solid preparation is a great antidote to a Wall of Worry

Concerns are always part of positive market movements. Bull markets, as they say, climb a wall of worry. These concerns help keep a lid on prices — and help give rise to a marketplace where there’s a seller for a buyer and a buyer for a seller. If there were no concerns, markets would be priced to perfection and would only disappoint investors moving forward.

One major mistake many investors make is confusing the stock market with the economy. We often use the analogy that the market is like a dog and the economy is like its owner: The owner/economy walks a straight line around the block, while the dog aka the market runs ahead, drags behind, stops and smells the roses, and does his business. Think back to 2009 – the economy was in shambles – but the market had one of its best-performing years in over a decade.

The “market” is really a constant pricing and repricing of future economic activity (and the individual investment opportunities therein) by the collective wisdom of investors. Though a mostly rational endeavor over the long term, it can turn into collective panic or euphoria for shorter periods. Sometimes, however, the market’s near-term panic appropriately presages worsening economic outcomes.

So how do you protect yourself? You determine your readiness to outlast winter. This is specific to you and your personal, professional, emotional and financial situation. You should start with a few major questions: Do you have enough cash/savings to meet any short-term declines in income — and for how long a period would those resources last? And, Is your portfolio invested such that you can emotionally handle staying the course during an extreme 2008-like environment?

Cash management and other asset allocation strategies

Your situation and concerns may not be satisfactorily solved by an algorithm, a robo-advisor, or a broker/dealer who gets paid by the trade. Most investors can benefit from exploratory conversations, deep, purpose-built financial planning and analysis, and contextual answers. Efforts our advisors at Halbert Hargrove strive to achieve.

But if you’re looking for a place to start, here are a few things to consider:

  • Make sure you have at least six months’ worth of expenses in cash/savings. A bit more if you’re a sales person on commission or a retiree living off your portfolio. A bit less if you have stable earnings and feel confident about your job prospects during a softer economy. If you’re looking for additional details on this subject, see our latest quarterly newsletter [HERE]. In it, we also introduce a new cash management strategy that’s enabling our clients to earn a more competitive rate than traditional bank savings accounts.
  • Consider keeping a few years’ worth of spending in short-term fixed income — especially if you’re risk-averse. At Halbert Hargrove, we utilize Goal Matching: We match portions of our clients’ portfolios to their specific spending needs over the near term. Perhaps it’s your mortgage, your kids’ college tuition, an upcoming wedding, or “insert-need-here.” The idea is that you specifically set aside funds for relatively near-term needs so you’ll have that money when you need it, regardless of market volatility.
  • Diversify, diversify, diversify. Diversify your portfolio (that’s easy), diversify your income sources (less easy) and diversify your sources of information and perspectives on the economy and the markets (may be the hardest of all). We all tend to seek out data that confirm our perspectives – this is called “confirmation bias.” It can be helpful to check your biases at the door.

Another consideration: Your portfolio may be too heavily focused on assets that correlate positively with one another. At Halbert Hargrove, we utilize a series of low- and non-correlated asset classes and investment techniques in our clients’ portfolios. These assets zig when others zag — and help reduce risk.

Currently, traditional defensive investments like core fixed income and cash are providing lackluster returns. Another objective of our low- and non-correlated investment strategies is replacing that yield gap while also providing defensive characteristics.

If you’re determined to sell out, make it a two-step decision

So you’ve read this far and you’re still thinking, “winter is coming and I need to get out of the markets.” You could be right. But if you’re going to make a major change in strategy, a quick word of advice: Timing the market is a two-step decision — when to get out and when to get back in.

The first decision is the easiest. You have data, you read the paper and all signs tell you “now” is a good time to sell. Say you’re right: You sell out and the market promptly falls. Problem is, how do you decide when to get back in? Historically, many investors who bail tend to wait too long to reinvest, missing much of the bounce back. Plus they likely paid commissions and may have to deal with recognized capital gains. And what if that sell decision turns out to be wrong? Markets will have continued higher and left your portfolio in the dust. Do you remain in cash, waiting for markets to come back to “rationality”? At some point you might have to capitulate and reinvest at even higher prices.

If you’re convinced that moving out of stocks is the right move for you, do yourself a favor and determine specific entry points for when you’ll reinvest: One for if you’re right, and one for if you’re wrong.

For those of you who are staying in the markets, but concerned about a white-knuckle experience? It helps to remember that over time, there are benefits to taking on risk and being an owner (or lender) to profitable businesses. Declines, even if material, are often short lived and help establish the next leg up in asset prices.

For more information or questions, please contact Halbert Hargrove at