The craziness in the markets has got the media excited. Some articles are a call to action. Immediate steps we need to take to protect ourselves from tariffs and volatility, or more measured pieces that advise us to make some adjustments to prepare for tariffs.
Thanks for the tips but you guys are a few months too late.
Too Late?
In most cases, it is now too late to adjust our portfolio – at least for this particular situation. Tariffs are here and the market has pulled back already.
In my opinion, the biggest risks with owning equities is the risk of being forced to sell at an inopportune time.
Now is an inopportune time. The market is down 10%.
Not Too Late?
One exception: For some it may not be too late. If I’m retired, I’m 100% in equities, and I rely on my equity investments to pay my bills, it may make sense to me to sell some equities now. I need some cash to pay expenses and I can’t afford to watch the market go down further.
But for the rest of us, we probably just need to take a pause and think about our situation.
Asset Allocation
I’ve written a bit about asset allocation here and here.
Having an appropriate asset allocation is as important as choosing the best investments. You can read more in the posts, but to sum up asset allocation, be sure that money you need to spend in the next 5 years is not tied up in the market.
While I’m confident that the S&P 500 will continue to be a wealth building machine in the long run (read more here), no one can predict what the market will do in the short term.
The S&P 500 has delivered roughly 10% annual returns with dividends reinvested over the last 100 years. That’s fabulous. But the S&P 500 pulls back 10% or more every 2 years or so. And it has had periods where it’s pulled back 50%. We’ve just been through a 10% pullback. It’s unpleasant.
But every single time the S&P 500 has pulled back, it has gone on to new highs.
This is why we need our growth-focused assets in equities, like a nice low-cost S&P 500 fund, while we need cash on hand to pay our bills.
Financial Planning
I know that I’ll lose some readers, but bear with me. Financial planning doesn’t necessarily mean hiring someone and it is not as hard as the finance industry would have you believe.
At a minimum, we should do financial planning once a year, and when a significant change happens – think having a child or nearing retirement.
Having a child means planning for all the expensive things they need like cribs, car seats, diapers and formula and college. This will likely mean a change to our financial plan.
In addition, on an annual basis, I like to take a look at my assets, and my allocation between cash, fixed income and equity. I look at any expected changes in expenses, and then think about whether I need to make some minor adjustments.
Example 1 – late 2018
I had always expected to work well into my 60’s. I loved my job and the people with whom I worked.
But somewhere around 2018, my job became less enjoyable. In 2019 I moved to a new group in the same company. This was even worse. Talking with friends in other groups, no one seemed to be having a lot of fun. So, I started to think maybe it was time to retire.
I was too young for social security, and I knew that I’d needed to start paying for healthcare out of pocket for myself and my wife. These would be big additional expenses to go along with a 100% drop in income.
I looked at my asset allocation, and I was very heavily invested in equities. In order to be sure I had cash on hand to pay my expenses, I sold a large chunk of equities in late 2018.
I sold some of my shares of Visa, Amazon, Apple, Booking, Netflix, Nike, Google and Disney. These were all big winners. I took some gains and sold some shares.
Nike and Disney are both down since I sold – so I got out before they pulled back. The others are all up between 130% and 250%.
It hurts a little to see what I could have had if I had left my investments alone.
But I could have been eating cat food and going without health insurance if the market had moved the other way.
Example 2 – late 2024
2023 and 2024 were both strong years in the market. The S&P 500 was up more than 20% in both years.
When reviewing my asset allocation in the 4th quarter of 2024, I realized that the huge gains in equities had made me overweight in equity compared to cash and fixed income. A raging bull-market will do this.
In 2024, I had the opportunity to sell equities that had risen in value and move the money to cash to expand my emergency fund and to better prepare me to weather a down market (so that I wouldn’t have to sell equities at an inopportune time).
2025 hit and it was the poster child for an inopportune time. The equities I sold in Q4 are down 10-15% since I sold them.
I’d love to say I’m a genius and I saw this coming. I didn’t. I’m as surprised as anyone else.
I merely executed my annual financial planning process as I do toward the end of every year.
p.s. equities tanked at the end of 2018 too. I looked really smart then. But as it always has, the S&P 500 came roaring back to go on to new highs.
Wrap-Up
In the middle of market chaos, it is typically not the right time to make portfolio adjustments. The only exception is if we don’t have enough cash and fixed income to weather the storm. If this is the case, it may be time to sell some equities.
But, if we are in that position, that means we had not had a solid asset allocation strategy. Money we need in the next 5 years shouldn’t be in equities.
Having a regular process to review our finances and make small adjustments can help us avoid some of the heartburn that comes with market volatility.