The Great Wealth Transfer has been historically known as the shift of assets from Baby Boomers to their heirs, which some estimate to be in the ballpark of $68 trillion over the next two decades.1 But, I’d like to share about a different transfer of wealth, one that all investors need to be aware of.
Where Did All That Money Go?
A client once posed this question after a significant market downturn. One day, the global stock market with worth x, and then it rapidly declines and is worth 30% less the next month. So, where did all that money go?
For such an astute question, I’m not ashamed to say that I didn’t have a good answer. But, here’s what I said.
Daily Valuations Pose a Problem
The stock market provides this unique way of valuing companies every single day, down to the penny. The problem with that is, as we’ve seen, those valuations can have drastic, short-term swings. Just as stock valuations can decrease quickly, they can also increase quickly. Therefore, it’s possible that “all the value” didn’t go anywhere, but is only taking a temporary break during a time or elevated uncertainty.
This is evidenced by what we often see after steep market declines; steep market rebounds. Can the global stock market truly appreciate by 30% in a month or two? On one hand, if you measure from the bottom after a 30% decline, sure it can. But you can also argue that it never truly lost its value to begin with.
Can There Be a Sale Without a Buyer?
In most cases, no. This means that when you sell your stock at a steep discount, someone is buying. The buyer could be another investor or a market maker.
Market makers can take the opposite side of a trade to provide liquidity for stocks that are listed on major exchanges. As stated by Investopedia.com in their article, “If Everyone Is Selling, Does Your Broker Have to Buy Your Shares From You,” just because a market maker might buy a stock that you’re selling, it doesn’t mean they are going to give you a good price.2 In fact, most market makers won’t purchase a stock unless they believe they can make a profit on it, which means prices will have to drop far enough for market makers to make a profit.
Stay on the Right Side of Every Transaction
This essentially means that every time you sell a stock or mutual fund at a steep discount, someone else, not you, is likely going to profit. So, why sell in the first place?
The best way to achieve investment success is to stay on the right side of every transaction. Don’t allow market makers, brokerage houses, and institutional investors or money managers with deep pockets to transfer your hard-earned money into their pockets.
Why You Need a Plan
Staying on the right side of every transaction might be easier said than done, but if you begin to understand some of these basic concepts, you can decrease your risk of locking in a poor transaction. I believe the best way to protect against a forced sale is to create a plan.
A good plan, especially for retirees or “near-retirees,” is one that provides plenty of liquidity, and liquidity that is free of market volatility risk. This could mean having a portion of your portfolio invested in money market funds, bond funds, CDs, etc. Of course, investing too much of your portfolio in investments with low expected returns could be detrimental, so balance is important.
Before the Next Crash
Will the next stock market crash occur in the fall of 2020? It’s impossible to tell. However, we happen to be in a unique point in time (post the March 2020 stock market crash and prior to the 2020 Election and next potential COVID-19 outbreak).
In other words, it’s an ideal time to review your investment plan so you’re not caught in a position that you’re forced to sell a stock or fund at a steep discount whenever the next crash does occur.
As always, speak to a licensed investment advisor, preferably a CERTIFIED FINANCIAL PLANNER™ professional for help with your specific situation. My encouragement to you and all investors is to stay on the right side of history and don’t become a victim of the next market-induced “Great Wealth Transfer.”
Sources:
1. CNBC.com; What the coming $68 trillion Great Wealth Transfer means for financial advisors; https://www.cnbc.com/2019/10/21/what-the-68-trillion-great-wealth-transfer-means-for-advisors.html
2. Investopedia.com; If Everyone is Selling, Does Your Broker Have to Buy Your Shares From You? https://www.investopedia.com/ask/answers/selling-bear-market-does-your-broker-buy-your-shares/
