Optimistic or Pessimistic? How About Realistic

optimistic pessimistic or realistic

Last Saturday afternoon, on our popular weekly radio show on WXTK 95.1, Jen and I discussed many of the risks the average investor faces today.  While risks, such as, inflation, interest rate, business and longevity risks are all real and must be accounted for, it seems like market risk is on the forefront of everyone’s mind.  As a result, this past week, we received numerous emails and calls from our listeners to ask Jen and I how we feel about the markets.  I must say that while the questions have come in different formats, the narrative seems to be consistent . . . are we more optimistic or pessimistic about the financial markets for the rest of 2020? 

Well folks, while on the one hand we seem to be seeing a steady stream of bad news about unemployment numbers and bankruptcies, the major financial indices like the S&P 500 have actually made a steady climb back from their March lows, encroaching upon their 52-week highs. So, how do we answer this question about which way the markets will move in the near term? Well, folks, to be honest, the truth is that our opinion doesn’t matter that much.

But what does matter is this.  Our message was clear.  We told them that they better have in place a financial system to help prepare for how the financial markets and economy realistically behave, not how they would like or predict them to behave. In the big picture, Jen and I are very optimistic about the historical long-term upside of the financial markets. However, we are also keenly aware that over our careers in the financial services industry, it has experienced the dot com bubble, the great recession of 2008, and now the pandemic-fueled craziness we’re currently experiencing.

Don’t get me wrong, I’m generally a very up-beat and optimistic guy. And I am a routine guy as well.  I wake up every morning by 5AM, get my reading and exercise in, and begin the day hopeful that things are going to go well not only for myself, but just as importantly for my family and friends. I genuinely love my job of helping people and that probably wouldn’t be possible with a negative outlook. I also realize that it would be foolish to cancel my homeowner’s policy because I was pretty sure the hailstorm was going to miss us, or stop using my car’s turn signals because I haven’t had an accident in decades. The reality is that a good deal of my optimism isn’t because I don’t expect bad things to happen in life – nope, it’s because I’m managing life’s risks as I go.

The same goes for creating a financial or retirement system. We certainly aim for reasonable levels of growth when there is growth to be had. But we also look for ways to manage the downside risk along the way. I know what you, Cutter Family Finance faithful are saying . . . managing both growth and the risk of loss is just good common sense.

The optimist might point out that, historically, the financial markets have been up more than they’ve been down. In the last six decades, the up days in the market have outnumbered the down days in the S&P 500 by as much as 9% and never less than 2%.  In 2019 alone, the S&P 500 had 59% up days and only 41% down days.  So, does this mean we should just buy and hold?  Sure – try telling that to someone who planned to retire in 2000 or 2008 . . . or now.  The S&P 500 annualized return was down three straight years (2000-2002) by at least 10%. And in 2008, the S&P 500 cratered over 38%. A lot of folks who planned to retire in those years found their plans rudely interrupted.

As I write this, even with all of the insanity of 2020, the S&P 500 is still within 10% of its all-time high. But there are too many storm clouds on the economic horizon to ignore the potential risk to your financial or retirement system. In fact, the Department of Labor has reported that more than 40 million people filed for unemployment between March 1st and the end of May. The National Multi-Family Housing Association released data showing that 31% of renters did not pay their April 2020 rent. A number of homeowners are falling behind on their mortgages, and business bankruptcies are significantly higher than last year at this time. So, clearly, we’re not out of the woods yet.

The fact that the financial markets and the economic news that we’re inundated with each day are not in agreement should serve as a reminder that the financial markets are not necessarily an accurate “snapshot” of the health, good or bad, of the economy. But folks, there is a way to still be cautiously optimistic and that’s by making sure your financial system includes a healthy dose downside protection to weather the inevitable down days that will come.  Are you prepared?

So, are Jen and I optimistic or pessimistic?  Nope . . . we are always realistic.

Make sure to be vigilant and stay alert, because you deserve more!

Have a great week folks.

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, Mansfield & Southlake, TX. Jeff can be reached at jeff@cutterfinancialgroup.com.

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