This seems to be the question of the day from most anyone who has an investment portfolio and has watched it cave during the past month. Here are five thoughts and ideas to consider for managing your investment accounts at this time.
No bells will ring when the bottom of the market is reached, just as no bells rang at the peak of the market.
Time horizon is a critical component for making investment choices. The longer your investment time horizon the more likely you are able to weather the financial storms as you will be adding to your investments in both good and bad markets and having the time to allow the markets to recover.
Systematic investing (recurring at regular periods of time) into such things as an employer sponsored retirement account, or your own IRA or individual portfolio, will average out some of the ups and downs of the market.
Retirees face a more challenging situation as time horizon is reduced and they are no longer adding to their investment portfolios.
One of the biggest mistakes individual investors make is to not maintain their allocation plan. Take for example an allocation plan designed to be 60% equities (individual stocks or equity mutual funds), 30% fixed (corporate and US bonds, CDs, etc.), and 10% cash (savings, money markets).
Consider what happened to the allocation last year. With equities up 20%–30%, the allocation changed significantly (this is also what happened in 2000-2001 during the tech bubble).
As a result of the market rise, the allocation plan at end of 2019 may have looked like this: 75%–80% equities, 10%–15% fixed and 10% cash. The result is a new, riskier allocation that got hit much harder with the market crash.
If the portfolios had been rebalanced back to the planned allocation at the end of the year (or first week of January), gains would have been captured, and the portfolio would have significantly reduced losses with the market crash.
When buying a stock or mutual fund, write down the reasons why you are making the investment. Every six months or so review those reasons and see if they are still holding true. If not, then it may be time to sell.
Or looking at it another way, would you buy the same stock today? If not, it may be time to sell. Lastly, the highest risk investments should be held in personal taxable portfolios (non-retirement) so that you may be able to “write off” losses and obtain an income tax benefit, reducing the overall loss.
Retirement accounts may or may not be a long-term investment depending upon age at retirement, health, and other circumstances.
However, the biggest difference between someone who is still working and those who are retired is an inability to recover as quickly from a downturn in the markets, especially one as dramatic as what we are now experiencing.
Retirees experience multiple problems: no longer adding to their accounts, taking withdrawals from investment accounts and/or distributions from retirement accounts, and having a reduced period of time for recovery.
In a down market, the withdrawals have a more severe impact as they are coming from a declining portfolio. However, the solution is fairly simple: having a proper allocation plan that is rebalanced at least semi-annually.
Of course, it’s important to maintain a conservative cash account to provide the necessary income stream for at least the next 12 months but preferably the next 18–24 months depending upon the overall financial circumstances.
As a result, retirees will be in a better position to weather the financial storms and not be forced to sell positions in times of economic turmoil.
Lastly, having been a professional independent advisor, I can tell you that having an unbiased opinion from a financial professional advisor can help resolve most of the issues you may face during times of economic storms.
It is very difficult to be objective when dealing with your own money! I always liked working with “OPM” (other people’s money)!
How often do you re-balance your investment portfolio? Do you have a professional advisor whom you trust, or do you handle your finances on your own? How has the market crash impacted your investment portfolio? Please share what you did or leaned in this financial crisis.