As we prepare to enter the second quarter earnings season, we have assembled some strategies for dealing with the volatility that is sure to accompany these corporate reports. You either have faith in the benefits of investing or you do not. Over the past 65 years, given a 5-year rolling period, a 50/50 weighting between equity and fixed income indices would never have produced a negative rate of return. Changes in the value of your portfolio should not alter that faith. It is not ironic that market downturns challenge this assumption. The news media jumps on stories of lost wealth and investors tend to get emotionally caught up in those stories. However, keep in mind that despite the horrific bear market experienced during 2008, the stock market as represented by the S&P 500 just set an all-time high this past week. You either believe in the fairness and longer-term opportunities of investing or you do not. If you think the playing field is stacked against you, get out now as stocks have tripled over the past 7 years rather than wait until a period of crisis ensues.
When to review account
Going about our daily business of financial planning and managing money, we are quite often asked, “How often should I review my account?” To that we respond, “How often should you shovel your driveway in the winter or water your lawn during the summer?” More specifically, the answer is whenever it needs it. When you have a change in your life, be it marriage, a new baby, a change in jobs, or the death of a spouse, review your financial situation. When the stock market is volatile, has lost more than 10% or for that matter has gained more than 10%, review your financial situation. As you approach retirement or another objective, review your financial situation. Investing is not a static environment. You shouldn’t review your portfolio merely on a quarterly basis. The stock market does not experience volatility merely because it is the end of a quarter. Review your portfolio as the values change or as noted above, as you experience changes in your life.
Have a plan
Have a plan to deal with the potential for a negative short-term outcome in a specific investment you have made or perhaps for a downdraft in the overall stock market. By nature, people are optimistic. We like to think good things will happen to all of our investments. However, as you know, that is not always the case. So have a plan for dealing with a negative outcome. Panic is not a strategy. Assess your situation and develop a sell discipline. Don’t fight the last battle or the ghosts of 2008. Investors have a tendency to miss opportunities because they remain afraid of a similar bear market like the one a few years ago. Allocate your investments according to your objectives and then, as noted above, closely monitor that allocation. That is your best chance of success. Otherwise, you’ll be getting 0% to 1% in the bank, which also puts your retirement plan and/or retirement income at risk. There is no problem holding some cash. If you are a bit skittish, a bit conservative or need a level of comfort, keep 10% to 25% of your investment portfolio (this excludes your vacation, rainy day, short-term money) in cash. You’ll sleep better at night and, who knows, you might be able to put this cash to work at lower market levels.
THE BOTTOM LINE: Establish a well-designed financial and investment plan. Then, monitor, evaluate and, as necessary, make changes to that plan along the way. This seems logical and simple. However, when fear of monetary loss and emotions get in the way, watch out. That is a certain recipe for buying high and selling low! Avoid this by sticking to your plan and being disciplined.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks, and fluctuations in principal will occur. Research any investment thoroughly prior to committing money or consult with your financial advisor. Note that Fagan Associates, Inc., or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, please call 518.279.1044.