The Planner's Perspective: Five Considerations When Markets Falter
By Paul Morrone CFP®, CPA/PFS, MSA
The headlines over the past week have been gut-wrenching. Like the bloodbath we saw earlier in January of 2018, the DOW dropped over 1,300 points in the matter of two days, wiping out much of the gains we have realized so far in the US markets this year. Investors’ tolerance for risk has been tested over the past 10 months, which is partially a byproduct of complacency with such docile markets over the past several years. Fortunately, there are things you can do to assess the situation and move forward (hopefully) without stressing too much. Here are a couple of things to keep in mind when were in the midst of a chaotic market.
Don’t panic – This is by far the most important thing to remember. Selling during a flash crash, or even worse, at the bottom of a recession, can permanently inhibit your portfolio’s ability to bounce back after a rut. This could potentially jeopardize your overall financial plan and ability to achieve your long-term goals, including retirement. While it’s never fun to see investment values decline, keeping your focus on the long-term is paramount. If you really can’t take the mental and emotional stress of investing, it may be wise to reevaluate your overall risk tolerance and financial plan when you have a cooler head.
Put it in perspective – Gains don’t come without risk. Volatility is normal, even though we haven’t seen much of it lately. From a historical perspective, US equity indices experience drawdowns of 5-10% approximately three times per year. In addition, we expect a correction in equity prices (greater than 10% pullback from a high) once every 13 months. Prior to this past week, there was a 75-day trading period (or about 3 months’ calendar days) where the major US indices did not close +/- 1% from the previous day’s value. This rapid transition from calm to volatile can make these crazy days feel even more painful when in reality they are not only common, but even expected as an inherent risk of investing in equities.
Remember, you’re probably diversified – Prudent investors recognize that opportunities and risks are available in many different asset classes and markets, many of which are not as widely publicized as the S&P 500 or DOW that you likely see on TV. A well-constructed portfolio designed for long-term growth will likely include assets that include an allocation to US equities, but may also have exposure to international and emerging market equities, fixed income or alternative investments. This means that your personal portfolio probably will not correlate directly to the numbers you see on TV.
You should have a plan – You’re investing for a reason, whether it’s for college, retirement or to maintain a legacy. You have made the decision to put your money to work with a specific outcome in mind. Rash and emotional changes to your allocation can throw you off course and compromise your ability to fund those goals that you’ve been investing for.
There’s good in the bad – When markets drop steeply and suddenly, this can create opportunities for investors looking to deploy idle cash. Just like many people shop for retail sales, investment purchasing opportunities can occur when prices are depressed. While it’s not prudent to bet the farm on ‘buying the dip,’ an opportunistic investor may see volatile markets as opportunity to buy at a discount rather than full price.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.
Diversification does not protect against market risk.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.