4 tips for dentists to avoid panicking during the next bear market

This past year was an interesting one for investments. U.S. and non-U.S. stocks ended 2013 with double-digit returns, but bonds and commodities both had negative returns. With the U.S. stock market seemingly reaching new highs every day, it’s easy to become comfortable in your financial routine and skip planning for the future. But we so easily forget that the last bear market (defined as a drop of 20 percent or more) ended just five years ago. During those dark days, many dentist clients contacted me and wanted to sell their stocks and exit the market - and that’s exactly the wrong thing to do during a bear market.

Dentists can use this time to take a step back, learn how much risk their portfolio has, and assess if it contains appropriate investments given the circumstances.

Here are four tips for dentists to weather the next, inevitable, bear market.

Don’t predict rather, prepare for the future

The Wall Street consensus for stock market returns in 2014 is 8%. To put this in perspective, the prediction for 2013 was also 8%; yet the U.S. stock market as measured by the S&P 500 returned 32.4% and ended the year at record highs.

Danish physicist Niels Bohr hit it on the head with his famous quote, “Prediction is very difficult, especially if it’s about the future.” Because there truly is no way to predict the future, what you can focus on is being prepared what we at our firm like to call planning for the certainty of uncertainty. That is, establish a thoughtfully diversified portfolio to help weather whatever the markets throw at us. If you work with a financial planner, ensure regular, at least annual, review meetings. He or she can help you navigate the current (and foreseeable future) market conditions.

Recognize your tolerance (or not) of investment risks

While the adage is, “Buy low and sell high,” fear and panic can drive people to do the opposite by buying high and selling low at market bottoms. In effect, this locks in that loss and a permanent impairment of capital.

Your tolerance for risk can be measured and will assess how much risk you prefer to take. Contrary to what many people believe, risk tolerance is a relatively enduring way that one individual differs from another and it is stable for each individual. What often changes is an individual's perception of market risk. During bear markets, people often flee the stock market because they perceive the risk as being greater than they did when the market was doing well.

To prepare for the next bear market, we recommend taking a validated risk tolerance questionnaire to assess the amount of risk that’s appropriate for you. Your answers provide a good starting point to a risk tolerance discussion. If you are married, make sure each of you completes a questionnaire separately to see how responses align with one another. This way, any mismatches can be tackled before addressing the portfolio.

Establish a target asset allocation

Set an asset allocation based on your age, risk tolerance, and need for return.

The younger you are, the more risk you can afford to take. Your portfolio is smaller, so percentage losses result in less of a decline in dollar terms and you have more years for the portfolio to grow and recover.

In addition to factoring in risk tolerance, discussed under #2 above, take account of the need for return. A 60-year-old dentist with a $5M portfolio is likely well on his or her way to comfortably funding his or her retirement. Why should the dentist expose his or her portfolio to a large decline? The return he or she requires from his or her portfolio is not as great as the 60-year-old dentist with a $500,000 portfolio who needs growth in order to catch up and have an adequate nest egg to fund retirement.

Create your very own investment policy statement

An investment policy statement, also known as an IPS, is a document that outlines how much risk the portfolio will contain. It provides a touchstone.

Times like this, with the markets making new highs, should lead investors to trim some of the riskier holdings as we’re five years into a bull market and risk levels have risen. At the depths of the next bear market, returning to the IPS will help ground you and keep you from selling out in a panic.
 
Even if you weathered 2007 to 2009 well and did not panic, we are all years closer to retirement and hopefully our portfolios are larger. This means there is more to lose if the market drops and less time to make the loss back.

Avoiding regret once the next bear market hits comes down to preparing for the unpredictable future. Prepare by recognizing how much risk is appropriate in your portfolio and creating a guiding IPS. Though determining your level of risk may depend on a number of factors, including your tolerance, as well as age, time horizon, and required return, by doing so, you are taking steps toward creating a healthy portfolio. These four tips should help you guard against panic and regret during the next bear market.
 
Editor's Note: This communication is strictly intended for individuals residing in the states of CA, FL, MN, NY, OH, PA, SD, WI. No offers may be made or accepted from any resident outside these states due to various state requirements and registration requirements regarding investment products and services. Securities and advisory services offered through Commonwealth Financial Network, www.FINRA.org/www.SIPC.org, a Registered Investment Adviser. Fixed insurance products and services offered by Greenwald Wealth Management, 1660 South Highway 100, Suite 270, St. Louis Park, MN. (952) 641-7595.