Given the recent market events, we wanted to share the below Q & A with you. It’s a bit lengthy, but we wanted to get all of this information out because many of our clients have found the answers helpful. Here’s to smart investing, even in tumultuous times!
What should I do with my portfolio right now?
The most important thing is: don’t sell -- despite how scary the headlines may be. History has shown us that investors that try to time the market historically do not outperform a buy-and-hold strategy. Check out this excellent graph from fivethirtyeight.com:
Imagine two people who each invested $1,000 in the S&P 500 at the beginning of 1980. The first one buys once and never sells. The second one is slightly more cautious: He sells any time the market loses 5 percent in a week, and buys back in once it rebounds 3 percent from wherever it bottoms out. At the end of last week, the first investor’s holdings would be worth $18,635. The second investor would have just $10,613. Source: fivethirtyeight.com
The long(er) answer: now is a great time to add more cash, rebalance, tax loss harvest, and diversify your portfolio. This is precisely what we are doing for thousands of our Premium clients.
What’s happening to the markets?
Many factors are contributing to the recent decline across the globe. China has devalued its currency, global investors are worried about China’s growth slowing, U.S. investors are uncertain about a potential Fed rate hike, and sadly some people are panicking.
How does this affect my portfolio?
Most people’s portfolios are down across the board, because both domestic and international equity markets are falling. If you had a well-diversified $100k portfolio as of a few weeks ago, the value may be down to about $90k now. We completely understand that it's scary to see a portfolio lose value, but remember, this is very normal when it comes to investing. The important thing is to remain focused on your long-term goals. If it helps, you can think of it as an opportunity: “there’s a sale on stocks right now!”
Have I “lost money?”
No, not really. On paper it looks like it, but you only really incur the loss when you need the cash and take the money out. Ideally your time horizon for the money has not changed, so there is no need to cash out, unless it is for an unforeseen reason that your emergency fund cannot cover. (unemployment, medical bills, etc.)
Is this volatility normal?
Yes, this is part of investing. While on average, U.S. stocks have returned 8% per year, that does not come at a steady 8% return each year. Instead, for example, you may see a sequence of returns like this: -37%, +26%, +15%, +2%, and the key is being able to stomach the large downswings by not selling. Remember, investing is a long-term game that requires patience and discipline. Also, you can help reduce your volatility by having a well-diversified portfolio that includes domestic and foreign stocks, bonds, and real estate. Recently, Domestic and International Bonds, as well as TIPS, have held their value, while Domestic and International Equities have lost value. Bonds play an important role in a portfolio and this is exactly one of the reasons we have them in our recommended portfolio, for they provide stability in turbulent times and provide a source of “dry powder” to rebalance from.
If you were an investor during the 2000 and 2008 markets, you probably recall “scary days” with financial markets topping the headlines and the Dow dropping several hundred points per day. Now, the markets have recovered to points higher than both of those times.
What should I do?
There are 3 things you can do:
1. Invest more
With investors scared, many folks would argue there are “good deals” to be had. We always recommend buying low-cost, indexed ETFs so you can own a broad section of the market.
2. Rebalance and tax-loss-harvest
In these scary times, investors flee stocks and move into safer havens such as bonds. Using our free recommendations, it may be a prudent time to rebalance your portfolio, or hire us to do it for you. This would likely mean selling bonds and buying equities, and while it may seem counterintuitive to be buying what is on the decline, that is exactly when you want to be buying. It is also a great time to harvest losses from your taxable accounts to offset gains or income.
We'll show you where you can save on fees, and improve your diversification to help keep your investments on track in all market conditions.
3. Do nothing
After items 1 & 2, this is also a good option. By doing nothing, you are giving your portfolio time to recover. John Bogle, the father of index investing and founder of Vanguard would say, “Don’t just do something - stand there!”
The thing you absolutely do not want to do is sell and move to cash. Unfortunately, many investors make this mistake and it often leads to missing out on the recovery. (See this WSJ article for more on that.)
Also, note how you're feeling. Are you terrified reading the headlines? Or do you understand this is a normal part of investing? Could you withstand another 10% decline this week without selling out of your portfolio? What about a 50% decline? Noting these emotions will help correctly determine your risk tolerance and stick with it in the future.
Should I adjust my risk tolerance?
We do not recommend adjusting your risk tolerance based on market volatility. Moving from Aggressive to Conservative will allocate more of your portfolio to bonds, and you may miss out on the equities recovery when it occurs. The key to picking a risk tolerance is being able to stick with it during good times and bad. It's definitely a good time to note how you are feeling when you log in and see your updated portfolio balance, though.
What are we doing for our Premium clients?
We’ve been helping our Premium clients during these difficult market conditions in a number of ways. On Monday alone, we rebalanced and tax-loss-harvested for about 40% of our clients. Market-based rebalancing helps reduce risk and keeps our clients’ portfolios within their target asset class bands, while tax loss harvesting can save thousands of dollars in taxes for clients with taxable accounts. Additionally, our licensed financial advisors have been working with clients via phone and email to answer questions about their portfolios. Our message to clients has been consistent: “stay the course,” as their portfolios remain on track for retirement, college, and other investment goals. Many clients find that having a portfolio manager is a great commitment device (meaning, a way to help stick with the plan).
We certainly understand this can be a difficult time to be an investor, but with the proper guidance and fortitude, it can also be a very rewarding time. Your financial success - let’s make it happen together!
Want to see what your portfolio really looks like, and if there are easy ways to help you have more money at retirement? Get your free analysis and recommendations today.
The views expressed herein are not intended to serve as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell securities by FutureAdvisor. The tax-efficiency discussed should not be interpreted as tax advice and it does not represent in any manner that the tax consequences detailed will be obtained. Clients should consult with their personal tax advisors regarding the tax consequences of investing. Differences in account size, timing of transactions and market conditions prevailing at the time of investment may lead to different results, and clients may lose money.