No coin has only one side. Like up cycles, down cycles are an inevitable part of the financial markets and the economies they are supposed to reflect. The Financial Crisis was in large part brought on by a head-rattling, mind-numbing lack of forward-thinking and priority given to providing reliable safeguards that would automatically kick in and protect Core Financial Assets when the market coin flipped heavily to the negative side.
When, not if. It has never been nor will it ever be a question of if the down cycles will arrive, only a question of when. And, as we have learned the hard way, the timing is unknown until it happens. Once a down cycle starts, and losses are being incurred, how do you put the toothpaste back in the tube? You can't, it's too late. Time to ride the waves.
Surf's Up! There are two main moving parts to the dynamic of recovering from any losses experienced in the financial markets. First, look at the chart of any index, stock, bond or commodity (examples below) and you will see how they all move in a fluctuating wave pattern. Bearing in mind that legs are strongest in the first phase of a foot race (to mix metaphors), if you have experienced any losses in a down cycle, the first and strongest phase of a subsequent market recovery or up cycle, by definition, is not devoted to real asset growth, but to the recovery or retracement of those previous losses.
The math of compound loss. The second moving part of recovering from market drops is how the math is not working in your favor. For example, to get back to breakeven from a loss of 50% would require a recovery gain of 100%.
Locked-in losses. Keep in mind that when financial or psychological pressure builds up during a down cycle -- which is particularly true when it comes to Core Financial Assets -- and the order to sell goes through, any losses incurred become permanent and the producing asset is gone forever.
Will what you worked for be there when you need it? Recovering from market losses that impact Core Financial Assets built over a long period is an uncertain process. Once caught in this position, you have absolutely no control over the timing of market recovery that will determine whether or not your asset value -- think life savings -- has been restored, if ever, by the time it is needed for date-certan milestone events such as college tuition and retirement.
To eventually recover in financial terms is one thing, but how do you ever recover the time it took to build these assets?
The lost decade. If we use Dow Jones Industrial Average as an indication of just how far the average investor has progressed over the last ten years, the simple answer is: not very far.
So, on average, how many decades out of the normal life cycle are your most productive? Approximately 3. What's the recovery strategy for this 1/3rd loss of the time value of your most productive years? There is no recovery.
Now, even to the most casual observer, smoke-and-mirrors mumbo jumbo like "Don't worry, it'll come back..." just doesn't cut it anymore when it comes to the reality of your time on this planet.
Solution. Start by first making a clear distinction between what you consider to be your Core and Non-Core Financial Assets. Then determine how these assets are positioned: either for growth with safety; or growth with risks and the inevitable setbacks that are a part of taking risks, especially in today's economic environment.
Below is a link to the Draw The Line Exercise Worksheet that has been provided for your convenience and private use. Take a couple of minutes to type account names only in the column that matches their current status of safety or risk, identifying each account as either a Core or Non-Core Financial Asset. Hit print and you'll get a quick picture of where you now stand.
With this as a baseline, you can make a clear decision to either stay the current course, or head in a different direction.
There are always alternatives.
To learn how to implement a crisis-tested strategy that utilizes the "Step Structure" to insure the sustainable growth and preservation of Core Financial Assets, click on the following link: