“I really don’t see what people are so worried about.”
My friend Al wasn’t being cocky. He wasn’t being cavalier. He legitimately didn’t understand the hubbub about the recent market correction, and he wanted me to explain.
“Well…” I started. “If you’re retired or close to retirement, a bear market can wreck your financial life. It can make the difference between living well and having to move in with your kids.”
Al looked at me, absorbing what I said.
“Right. But that’s what I don’t understand. Why would you have all of your money in the stock market if you knew you’d be retiring soon?”
A Different Perspective
Al’s not from around here. He grew up in a village in the Middle East and immigrated to the United States after medical school. He’s become a wildly successful doctor with an annual income in the seven figures. He’s also one of the smartest people I’ve ever met in my life.
But Al comes from a different world. We once argued over whether the Karate Kid was a 1980s movie or a 1990s movie. When a Google search settled the argument, he shrugged: “By the time it made it to my country, it was the mid-1990s …”
When I pointed out that the clothes and music in the movie were distinctly 1980s style, he got annoyed with me. “Yeah, those clothes and music also made it to my country in the mid-1990s.”
Sometimes, when you’re in the middle of something, you are blind to how ridiculous conventional wisdom can be. You need someone from the outside to show you.
So, my friend Al raises a great question.
Why Do People Worry About Market Corrections?
The short answer is that they’re taking on too much risk, and they don’t have a plan.
Al has money in the market. But he also has rental houses, land, precious metals and a good-sized pile of cash in the bank.
If the market lost half its value tomorrow and never recovered, he’d be just fine. He’s not taking excessive risk, so he doesn’t have to worry.
Al also has a plan. He allocates his savings across multiple investments, none of which tightly correlate to the rest.
So, what can we learn from Al’s market correction approach?
How to Be Like Al
To start, if you’re losing sleep over the recent bout of volatility, you have too much money in the market. Sell something, or reduce all of your holdings by some percentage that makes you more comfortable. Sell until the anxiety stops.
Longer-term, you need a plan. Some portion of your wealth should sit in buy-and-hold stocks. But there are plenty of options for the rest.
If you have the money, take a page out of Al’s playbook and buy a rental house or two. Or, buy a small commercial property. Or, perhaps try one of my colleague Adam O’Dell’s trading strategies.
It also helps to live below your means. Al is wealthy and earns a ridiculous amount of money from his career. But he still lives on less than half his income. If he hit a rough patch, he wouldn’t need to make any major lifestyle changes because his margin of safety is enormous.
You may not earn as much as Al. But you can still follow his lead and choose to live below your means. Stretching your budget to buy a bigger house or car cuts into your margin of safety. It exposes you to greater risk, which increases your anxiety when things go wrong.
I don’t know how much further this market correction has to go. It may be over by the time I finish writing this sentence. But there’s also the real possibility the market has a lot further to drop.
If you want to sleep at night, follow Al’s lead. Spread your bets around and keep a healthy cash cushion.
To safe profits,
Co-Editor, Green Zone Fortunes
Charles Sizemore is the co-editor of Green Zone Fortunes and specializes in income and retirement topics. He is also a frequent guest on CNBC, Bloomberg and Fox Business.