How do I safely navigate turbulent markets?
“A couple years of calm can lull less seasoned investors into thinking that calm is the new normal. Of course it is not.”
Information provided reflects the author’s views as of [02/2019]. Such views are subject to change at any time without notice. Signature Estate & Investment Advisors, LLC (SEIA) has obtained the information provided herein from third party sources believed to be reliable, but no representation is made as to their completeness or accuracy. *Investing is subject to risks including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary.
All investors dislike market turbulence, but market veterans know that it is a given and understand that when it comes, it will pass. Not only do most develop a tolerance for it, but the best among them also have a plan for weathering temporary downturns.
On the flip side, a couple years of calm (see 2016 to 2017) can lull less seasoned investors into thinking that calm is the new normal. Of course it is not—there have been 11 recessions since World War II. So, considering the events of fourth quarter 2018, it seems a good time to revisit some questions that can help veterans and amateurs alike navigate turbulent markets.
Let’s begin with a couple of terms we often hear when the market drops: bear market and correction.
WHAT’S A BEAR MARKET, AND HOW DOES IT DIFFER FROM A CORRECTION?
Bear markets, on average, occur once every 3.5 years and last 367 days. They begin after prices have fallen 20 percent or more from their 52-week high. For example, the Dow Jones Industrial Average hit its record high of 26,828.39 on October 3, 2018. If it fell 20 percent— to 21,462.71—or more, it would be in bear market territory. Corrections, which are actually fairly common, involve a price drop of around 10 percent and occur every 16 to 17 months on average.
HOW WELL WILL YOU TOLERATE MARKET TURBULENCE?
This is where your “navigator,” i.e., your advisor, comes in. As experienced advisors, we know there is an art to understanding each investor and his or her tolerance for turbulence. An effective advisor accurately assesses each client and formulates a plan that makes certain the client can financially and emotionally weather the market’s inevitable volatility. So…
WHAT IS A GOOD PLAN?
We think a good plan should have provisions for getting through adverse market periods, including:
Asset Allocation and Location*—
Allocation is designed to give your portfolio a variety of complementary investments that provide diversity in their nature and underlying drivers. Location means you have assets in different types of accounts—retirement, trust and so on.
Participating When the Market Snaps Back—Not even the most astute investors can predict the start date of a recovery. So rather than jump in and out of the market, good investors maintain their stock exposure, so they’re set to benefit the moment the market snaps back. Why? Because missing the strong positive returns from just a few of what are called the “best single days” can materially reduce investor returns.
Clarity for Your Income/Cash Flow Needs and Spending during Turbulent Markets—You have cash needs each year, scheduled and unscheduled. Building in conservative instruments that mature each year (at various times of the year) can provide the flexibility to avoid selling stock investments when they are down.
Regular Rebalancing—In down markets, your portfolio’s stock portion may shrink, moving it away from its target allocation. In our view, the “dry powder” for rebuying stocks to bring them back to target comes from conservative investments, which should likely not have seen the same declines.
Dollar-Cost Averaging (DCA)*—Continue regularly scheduled cash savings, even when stocks are plummeting. Saving creates an opportunity for these new dollars to fulfill the quintessential market mantra: Buy low(er)!
To sum up, acceptance of market turbulence, combined with a good advisor-developed plan, will help you navigate markets at a risk level you can tolerate. But at the heart of it all is this goal: Have a plan and stick to it.
Securities offered through Royal Alliance Associates, Inc., member FINRA/SIPC. Investment-advisory services offered through SEIA, LLC. Royal Alliance Associates, Inc., is separately owned and other entities and/or marketing names, products or services referenced here are independent of Royal Alliance Associates, Inc. (CA Ins. License #0798553).