Maybe. Maybe not. Suppose you have 40% of your portfolio invested in stocks – assuming your holding represent “the market” being predicted – and the rest of your money is in bonds and cash.
Assuming your bonds and cash remain at the same value, how much impact will a 20% market drop affect you? Simple math: 40% drops by 20%: 40 x .20 = 8%. So, if the prediction comes to pass and the rest of your portfolio stays the same, you would experience at 8% decline in your assets.
Of course, this is all hypothetical theory. In the real world, it’s a little different. First, bonds seldom stay the same. If interest rates drop, the value of existing bonds will increase. The reverse is true if interest rates increase.
And cash? Well, it’s worth only what it will purchase; so, if inflation averages 3% in a year, the value of cash has declined by 3%.
So, nothing happens in a vacuum. And, what a ‘market’ move means to you depends on how other components react. If you have a solid, stress-tested financial plan, the ‘white noise’ of media predictions, so often chased by those who don’t know any better, can just go in one ear and out the other. If you don’t have a plan, you can get one started securely here.
And, remember what Warren Buffett once said: he never met anyone who could predict the market.
Jim
