What Smart Investors Do During Market Volatility? (Hint...Both Panic Selling and "Doing Nothing" Are Problematic)

2022 has been challenging for markets. Stocks are down more than 13% so far and the investments that were supposed to do well in down markets, bonds, are also down more than 8%. Many investor portfolios are also down double digits and that naturally creates uncertainity and even panic. This can lead to abandoning your investment plan and selling assets. Other investors that are more confident in their long-term investing future or have longer time horizons are simply sticking their head in the sand and ignoring the market, hoping it will get better. Regardless of where you are on the spectrum, making smart decisions during downturns is key to long-term success.

What if I’m feeling uncertain or nervous?

It’s only natural to feel uncertain during down markets, I’ve never met a human that doesn’t feel that way. The key is how we act on that uncertain feeling. Smart investors allow data and intelligence to drive their decision making instead of emotions. If you are in this camp, the first step is to revisit your investment plan and objectives. Just because the market is down 13% doesn't mean that your retirement or other investment goals are necessarily off track. If you have a well constructed long-term investment plan, it should have taken into account market volatility. Zoom out and understand where we are on a longer-term investment horizon. Markets produced above average returns from 2019 through 2021. Now we have experienced six months of below average returns. It is likely that over the long-term, markets will produce the historical returns that are expected in a well-crafted financial and investment plan.

What if I’m in or nearing retirement?

As you approach or are in retirement, it's important to remember that your investment timeline is still really long. Many of our clients are living 20 or 30 years in retirement, well into their eighties and nineties. So you’re going to be an investor for a while :). That means that you have time for your portfolio to recover and continue to grow over the long-term.

Consider your sources:

Consider what you're listening to and watching on TV. Everything we know about psychology suggests that we are influenced by what we take in, even if only subliminally. News networks and even podcasts are in the business of compelling you watch and listen day after day. They are in the business of viewership, not in the business of providing sound financial advice. Thus every small piece of data means either the sky is going to fall or that markets will only rise from here. Neither of those outcomes are true. Not all news is bad, so just consider what you consume and how it might impact your decisions.

What if I’m still not comfortable with my investment plan?

If you are still not comfortable with your investment plan or portfolio, there could be two different issues. First, your portfolio might be wrong; or, second, your expectations about the returns and volatility of the portfolio could be wrong. Either way, it's important to align your investments with your expectations so that you stick with your investment plan over the long haul. If you still feel uncomfortable with your portfolio, it may be time to seek professional guidance so better align your expectations and investments.

That brings us to the other side of the spectrum. “I’m confident in markets, so I’m just going to ignore everything until the market rebounds”

Committing to an investment plan long-term and sticking with it is key to investing success. However, “doing nothing” during downturns means lost opportunity. There are two actions that you need to consider during market downturns:

1) Rebalance your portfolio

Rebalancing involves buying and selling investments to return your portfolio to its target long-term asset allocation, otherwise known as the percentage mix of stocks, bonds and other assets you own. Over the last few months stock and bond prices have fallen. Other types of assets have risen, commodities in particular. Therefore, it’s likely that you have too much of some assets in your portfolio and not enough of the others. The discipline of rebalancing provides the best chance of buying low and selling high over the long term.

2) Tax Loss Harvesting

For investors that pay taxes, tax loss harvesting is crucial to generating better after-tax returns. Tax loss harvesting is the process of selling one security that has declined in value and buying a similar security to maintain your exposure to markets. For example, assume you owned Coca-Cola stock at the beginning of the year. Now the price has dropped. To recognize the loss on your taxes, you would sell your Coca-Cola shares and perhaps buy Pepsi shares at the same time. The new Pepsi holding is not identical to Coca-Cola, but is likely to perform in a similar manner. You also get to use the loss to reduce your investment or other income when you file your taxes. The same exercise can also be used for portfolios of mutual funds and ETFs. The tax implications can be complex, so we recommend discussing your tax and investment strategy with a professional.

No matter where you are on the spectrum, taking smart action, influenced by data and intelligence, will help you navigate challenging markets.

Think you might benefit from professional expertise and guidance? Schedule an intro call to connect with our team. In these meetings, we simply ask a bunch of questions to get to know you and your situation. If we both think there is a fit, then we will schdule a subsequant meeting to discuss a specific proposal designed around your needs. Not ready for a call? Listen to The 6 Figure Investor Podcast anywhere you listen to podcasts.