Being patient and showing discipline are key behaviors.
The start of 2022 has come with plenty of challenges for investors, as both domestic and international equity markets are down. As of May 10, 2022, the Dow Jones Industrial Average was down 11.90%, the S&P 500 was down 16.15%, and the MSCI EAFE Index was down 17.00%. Compounding these challenges is that bonds—normally a safe haven when equities are struggling—have also been down. For example, the Bloomberg US Aggregate Bond Index was down 10.11%. There are very few places to hide in market environments like these.
When markets are down significantly, investors commonly feel a sense of panic or fear they are losing everything they have accumulated. They obsess over the financial news and are tempted to sell to preserve what is left. However, these moves typically provide short-term comfort at the expense of long-term goals.
Selling after the markets are down may significantly reduce your ability to make up those losses in the rallies that historically occur after a sharp decline. For example, after the 2008-2009 financial crisis—in which the S&P 500 was down as much as 51%—the following rally lasted 118 months and was up over 300%.Following the Dot-Com crash in 2000, when stocks were down 45%, the following rally lasted 61 months and was up over 100%. In fact, following every sustained down market has been a significant and sustained upward rally.1
Benefitting from these rallies requires being invested in the market. If you sold previously, you may miss out on all or a significant portion of the rally. You may be thinking, “But what if I sold when things started going down, then bought back in at the bottom?” Timing the market is incredibly difficult to do. How will you know when the market is headed for a sustained downward slide? How will you know when the market has reached bottom? These are nearly impossible things to predict, and guessing wrong can negatively impact your investment success.
Surviving a down market requires some key behaviors: patience and discipline. You must have patience that markets will turn and move in an overall positive direction over the long term. This also means not chasing the hottest trends and trusting your investment strategy will produce the long-term results you desire. Discipline means continuing to adhere to an asset allocation strategy and diversified investment mix that can help you reach your financial goals. If you feel like you must take some sort of action, the following includes a few activities that can be helpful:
Rebalance your portfolio. Market volatility can skew your allocation from its original target. Certain assets will be more affected by market swings and will move outside their target allocations. Rebalance your portfolio by selling positions that have become overweight in relation to the rest of your portfolio and move the proceeds to positions that have become underweight.
Tax-loss harvesting. In taxable accounts, if any investments are in the negative, you can sell those investments to capture the loss. These losses can be used to offset gains elsewhere, or up to $3000 per year can be used to offset income taxes. Tax-loss harvesting can help these accounts become more tax efficient moving forward.
Review your risk tolerance. Risk you took on years ago may no longer make sense, given your current circumstances and life stage. If you are less open to risk, consider adjusting your target asset allocation.
Implement defensive tactics. If you must trade during volatile markets, there are defensive steps you can take to protect your positions. Stop orders and stop-limit orders can help shield unrealized gains or limit potential losses on an existing position.
When markets are struggling, you may be tempted to take action. However, reacting during these time periods may cause more harm than good to your investment portfolios. Correctly guessing when to get out of (or back into) the market is very difficult to do correctly. If you must take action, consider less-substantial maneuvers such as tax-loss harvesting, rebalancing, and implementing defensive tactics like stop-limit and stop-loss orders. Before taking any action, we recommend you speak with your financial professional or certified public accountant to better understand their financial or tax implications.
1. S&P 500 Index – 90 year historical chart. Macrotrends. Accessed May 18, 2022. https://bit.ly/3u6JrXY
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