I recently got in touch with some of the children of my doctor’s clients who are now medical students themselves. It gives me great pleasure to congratulate them on their hard work as they are linked to their residency programmes.
In between these calls, I heard from one of my clients who is an active doctor. He had been reading financial articles over the past few months and was convinced that the market was in a steady decline. For this reason, he felt that the best option was to sell everything, then wait a year and buy it again when the market reached the bottom.
In my 17 years as a financial advisor, I’ve seen this sudden reaction often. In times like these, a good financial advisor should be considered an ally who acts as a guide when feelings are running high.
You often see a focus on bot advisors in financial circles today, but people forget that when it comes to catastrophic events, bot advisors are not equipped to deal with the human concerns of investors. They cannot speak directly to investors and provide guidance appropriate to unique circumstances, nor can they advise investors on unusual market movements. The decisions that investors make at times like these are vital to the health of their accounts and their long-term goals.
Here are five very useful rules that investors should follow.
1. Stay Invested
The situations caused by high interest rates that create uncertainty about things like inflation and stagnation are not necessarily surprising. Unfortunately, monitoring market volatility is not a reliable way to predict position length. However, by looking at similar events, such as the recent recession, some things can be learned. Lesson one: While there is a defining effect in the short term, the long term market recovery has ended up being higher than the market was.
In fact, there is a greater than 75% chance that the market one year from now will be above where it is currently. If we look further, the probability that the market will surpass its current state within 10 years is close to 100%.
With these observations in mind, long-term investors should hesitate before withdrawing from the market in times of instability; Rejections are times when you stay invested and may be seen as buying opportunities.
2. Market timing is not working
Given the current state of the market, it’s important to remember that this is an event-driven sale – a direct result of skepticism both inside and outside the United States. This differs from previous declines where there may be a systematic error in the market itself, as was the case in 2008 when the market was about to correct. Excessive selling in the market is purely a reaction, which means that when an event or situation is resolved, the market will begin to recover.
Another difference between this and other downturns is the rate of decline. In the bursting of the 2001-2002 tech bubble that precipitated the market downturn, it took time and then years for the market to regain strength. The 2008 financial crisis had a similar timeline.
Now, in 2022, we’re seeing a much faster decline – in a month and a change. This is partly due to advances in technology and automated trading; What used to take years can now happen in a matter of weeks. Of course, a quick drop leads to a faster reaction as the market goes down, but it also allows the market to go up just as fast.
What does this mean for the investor? Someone who gets out of the market will miss out on that quick recovery. Taking another look at the last 20 years of the market, the average return is 8.6% per year.
If the investor exits the market only for the top 10 trading days of the 20-year period, the return will drop to 2.5% per annum. . There is no way to predict when those better days will come, and sometimes they can come when the market seems to be in a rough state. If you are not an investor in the market, you will not benefit from any of it.
3. Asset allocation is the key
It is only human to succumb to the panicked urge to sell and then re-enter the market at a more convenient time. However, it is best to fight those urges if you are looking to preserve your net worth. Determining the best moments to enter and exit the market is a guessing game and not a sound investment strategy. Investors are more likely to harm their financial position by selling at the wrong times and not diversifying properly.
By selling at the wrong time, the investor locks up these losses, and it is very difficult to determine the ideal time to reinvest, so more damage is done. Diversification may sound like an overrated adage, but it is a methodology that will protect the investor.
If an investor is overly focused in one sector, a sharp decline in that sector deepens the investor’s losses. If we look back at the events of 2008, many people invested heavily in finances. When the market recovered, as expected, these investors never regained what they lost.
It’s normal to have an emotional reaction to market events, especially when they affect your retirement funds. However, a stifling panic will likely save your assets in the long run. Instead, contact your financial advisor – for guidance, to find out why you keep investing in the market, to examine your portfolio, and to make sure you are properly diversified.
4. Buying during chaos
When the stock market goes bust, there is always someone who says “it’s different this time” and therefore it’s more dangerous. However, keep this in mind: each dip has a different cause, a different time period, and a different resolution. Because dips are rarely expected – whether it’s the oil crisis, the COVID-19 pandemic, or any other unique circumstance – experts haven’t been able to prevent them.
Trying to consider the situation as a new and terrible obstacle without a solution is less helpful than applying the principles of safe and consistent investing – diversify, set and keep your goals, and stay on course – regardless of the reasons for the market downturn.
For some smart investors, a stock market slump becomes buying opportunities that lead to positive outcomes. High net worth investors often invest in the panic of less experienced people. Because emotions do not govern their decisions, they are able to find good investment options at prices much lower than usual. They may choose to invest in premium companies 20%-30% less than the typical cost – pricing is only available during turndowns.
However, not every low-cost investment is good. Small companies are more affected by market conditions because they cannot support themselves in the way that large, established companies can. Larger companies will have some reduction in the short term but can recover more quickly due to their experience and resources.
As the broader market recovers, these are the companies that will gain more market share as smaller companies are forced to pull out. For an investor, it is generally best to think primarily of diversified investments with large, well-established companies during a market downturn.
5. Time to Harvest Taxes and Roth Transfers
Another strategy to explore during a market downturn is tax harvesting – selling investments that have fallen, then replacing them with similar investments and offsetting the investment gains made with the initial losses. Ultimately, more money is still being invested because less of it is paid in taxes.
Another strategy to consider is a Roth IRA conversion. Using a Roth transfer during a market downturn, you will end up paying lower taxes on the principal amount, as market conditions will cause that amount to go down. Once the funds are transferred to a Roth IRA, the funds will expand and can be withdrawn tax-free once the investor has had an IRA for at least 5 years and reached the age of 59½.
The forward-looking market may recover sooner than expected if global conditions improve more quickly than expected. To protect existing assets and prepare to benefit from the recovery, investors should work closely with a financial advisor who is dedicated to examining market conditions and addressing investor concerns, and striving to provide investors with protection and potential, particularly when challenges arise.
The securities are offered by Securities America, Inc. , Member of FINRA/SIPC.
The opinions and expectations expressed are those of the author and may not be reality. This information is subject to change at any time, based on market and other conditions, and should not be construed as a recommendation for any specific security or investment plan. Past performance does not guarantee future results.