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How to Handle Bear Markets Thumbnail

How to Handle Bear Markets

Quote to Ponder

"A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves. But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices." - Warren Buffett (1997 Annual Shareholder Letter)

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In crafting your financial plan, we project a tax return each year for the rest of your life, accounting for tax deductions, changes in dependent status of your children, deductible 401(k) contributions and the Tax Cut and Jobs Act expiring after 2025. We account for medical expenses, your mortgage being paid off, the effects of inflation, and college expenses. We measure your savings, withdrawals, employer match and stock options. We measure the risk of markets, and modeled the potential impact of 1,000 different statistically possible market scenarios. We do our best to review these details with you each year and account for any changes. We have an investment policy in place, and rules for how to adjust your retirement withdrawals in different market conditions. In short, we are relying on the absolute best tax, market, economic, expense and personal data and then model projections with the best software we can buy.

But you know what? Your plan is wrong. Despite our very best efforts, it was wrong from the moment it was created. In fact, I'm quite certain that not one of the 1,000 scenarios we modeled will come to pass.  Even if we knew the exact returns of the market for every year going forward for the next 50 years, your plan would still be wrong. There are simply too many variables at play for your plan to be accurate. The markets will change. Taxes will change. Inflation will change. Your life will change.

How do we deal with all of these uncertainties? We have two tools.  The first tool is what Warren Buffett's mentor Ben Graham called the Margin of Safety. Margin of Safety is an investment and engineering principle used to ensure an adequate buffer is built into plans, guarding against any unforeseen issues. We apply this principle to your financial plan. Since we don't know market outcomes, we make sure your plan can survive the vast majority of potential market outcomes. We keep a healthy cash reserve and a war chest of safe bonds. We make conservative assumptions throughout your entire plan. 

The second tool is adjustment. The Apollo rocket was off course 93% of the time and only got to the moon thanks to constant course correction. In your financial planning life, we must make similar adjustments. This could be rebalancing, tax loss harvesting, spending less, retiring later or saving more. A plan is just a snapshot -- planning is constant course correction to hit a target.

Even though your plan is most definitely wrong, it is designed to get you to where you want to go. We'll make sure of it. 

Quarry Hill News

My (Bjorn) family took an RV trip this past month.  We are more cabin people than camping people, so this was a big adventure for us (and it turned into a bigger adventure than expected). We traveled to the Badlands, The Black Hills, Devils Tower, Grand Teton, and Yellowstone. 

The landscaping out West is simply breathtaking and filled with strange highlights that are hard to believe are natural. At the end of the trip, we drove through Yellowstone. On the way out, we were informed that the road we had just traveled on had been destroyed by flooding during the night. Worse yet, all of Yellowstone was closed due to the flooding. Since we couldn't go to Yellowstone, we decided to leave. However, the only other road out of our town was under 6 feet of water!  

So, when life hands you floods, you go horseback riding in the mountains. I was interviewed for the radio show All Things Considered, but in the end, they decided the story "Trapped Tourist Family pivots and has a fantastic time" wasn't the compelling scary narrative that their listeners were looking for. In the end, the water receded in a couple of days and we were able to continue with our trip right on schedule.