Over the past few weeks investors have seen a rapid decline in the value of their investment portfolios. For many younger investors, this is the first time they’ve seen anything resembling a bear market. For others, market volatility has created anxiety, fear, and uncertainty.
As professionals who have guided clients through all types of markets and crises over nearly four decades, we want to share some thoughts about what you can do today in the face of an uncertain future.
1. Understand that stocks go up over time.
As a company’s profits grow consistently, their stock prices tend to increase as well. Macro-economic factors such as interest rates, unemployment rates, and inflation often dictate whether the environment is conducive or not for that profitable growth.
The current uncertainty surrounding the coronavirus pandemic has created an environment that could very well slow down the economy, causing a slowdown in company profits. On top of this, the oil price war recently launched by the Saudi’s will have far-reaching consequences for the energy sector which has been one of American’s key growth engines over the past decade.
Stock markets are forward-looking. They are pricing the future into today’s stock levels. What global markets have been telling us over the past few weeks is that the pandemic, and now lower energy prices, will slow down global demand and growth.
2. The best time to buy anything is when it is cheap.
If Nordstrom had a “30% off everything in the store” sale, it would be tough to resist. But here we are today, with a US stock market nearly 20% below January levels, and investors are uncertain whether they should buy, sell, or hold. In hindsight, the best thing to have done in March, 2009 when markets hit rock bottom was to buy. The below chart shows the large difference between those who sold at the wrong time, those who stayed the course, and those who added to their portfolios. But, unfortunately for investors, bells don’t go off at market bottoms. What we do know is that buying stocks at historically inexpensive levels is almost always a good investment. We believe we are at that point.
3. Buy gradually.
Even in the best of times, it makes sense to ease into a portfolio to smooth out the impact of day-to-day and week-to-week market volatility. If you are going to invest now, think about how much you ultimately want to commit to a portfolio, and do it over a three- or four-month period in equal installments. This “dollar-cost averaging” (as depicted in the chart above) doesn’t require you to pick the exact market bottom to have a successful long-term investment outcome. You just need to commit to doing it.
As tempting as it is to buy a single stock or two, a diversified approach is the best way to achieve your long-term financial goals. The history of Wall Street is littered with previously blue-chip companies that fell from grace: GM, GE, Sears, Bethlehem Steel, Eastman Kodak. Remember, bad things can happen to good companies. Diversify your stock portfolio, but make sure you also own bonds. During times like we are experiencing now, a broadly diversified portfolio that includes bonds is outperforming an all-equity portfolio. When markets turn around, these portfolios will have less ground to make up.
5. Accelerate your retirement plan contributions.
While we don’t know how much lower markets will drop in 2020, we do know that investments are significantly cheaper now than they were in January. Markets will eventually recover. If you are going to make a retirement plan contribution this year, why not do it when prices are cheap. Yes, they could get cheaper, but you are investing for the long run. If markets take a year to recover, you’ll make another contribution then.
6. Work with a financial advisor who is a fiduciary.
Take stock of the quality of the advice you’ve received up until now. Is your advisor a bank employee or a registered investment advisor (RIA) who is bound by a fiduciary duty to always put your interests first? Does your advisor sell bank products like expensive mutual funds, annuities, and alternative investments? If so, they are likely earning a commission to sell you products, and not advising you in your best interests.
To give yourself the best chance to meet your long-term goals, consider an SEC-registered independent RIA who can help you create a financial plan, implement that plan with a diversified, tax-efficient and low-cost investment strategy. Most of all, hire someone who has the time-tested experience and steady hand on the tiller to help you navigate during times like these.
What You Should Do Next:
- Contact us with any questions or concerns about your investments, the financial markets, or for more information on how we’re helping our clients.
- Read our relevant article, A Client Perspective: Four Decades of Advising Clients.
- Click here to learn more about the ClearRock approach and process.
- Speak with one of our Senior Advisors.
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