Perhaps you have just turned on the morning news, poured a second cup of coffee, and are wondering what effect the recently volatile stock market will have on your investment portfolio and financial goals. COVID-19 seems not only a health risk but also an uncertain prospect for your money. Many investors share your concern because they also may have a substantial amount of their wealth invested in a market going up and down (and more down than up recently) at a time of tremendous uncertainty.
Historically, “bull” and “bear” markets occur with the almost automatic expansion and contraction of the economy. They are considered the ebb and flow of wealth accumulation. Bear markets, for instance, are viewed as normal and necessary, as they serve to “clean up” what are considered prior economic excesses. You might wonder, is it different this time, and what should I do? The reality is, certain investing strategies remain even in the time of COVID-19.
Taking the Long View
Long-term investing is more often about the psychological aspects of managing money and sticking to a financial strategy. It is important to understand how market conditions create euphoria or fear in some people. Retirement may be decades away but the sight of a 401(k) value down a few percents in one day creates real concern.
Market corrections will happen. Bear markets tend to prepare the way for future bull markets. While investing carries specific risks, many of those risks may become more acceptable and tolerable by remembering, for instance, that what is occurring in a bear market is a revaluing of securities. If you have a long-term goal, maintain a long-term view.
Stick with Your Plan
It is only natural to ask, “What’s the best move during this time?” What all long-term investors should realize is that bear markets create opportunities. It is the long-term picture that investors need to keep in mind. Your original investment goals may be unchanged, whether they include accumulation for retirement or funding for a college education. If you still have income, keep saving!
Since a bear market on the heels of a bull market reflects a long expansion cycle of growth, it is often easy to lose track of the basics that will see investors through an economic slowdown. Investment opportunities are always present. Therefore, the general rule is to continue in the same direction by maintaining a well-diversified portfolio. How do you get a well-diversified portfolio? SAVVI can help. By entering your accounts and sharing your risk tolerance with SAVVI, you can get personalized guidance on how to invest. What are other important considerations with regard to risk and long-term planning?
· Age and Stage in Life. Generally, the younger you are, the more risk you can assume. If you are single, you may be able to afford more risk than a married couple with children. If you’re just starting your career, you may be more comfortable with higher-risk investments than if you are retired or approaching retirement.
· Available Resources. With greater wealth, you may handle losses more comfortably. The financial resources you have are likely mostly long-term investments and you have time on your side.
· Personal Temperament. At every stage of your investing life, it is important to evaluate how well you would handle the possibility of losing any funds you invest. Though you may find a roller coaster ride thrilling, you may not enjoy a wild market “ride.” The stock market, for instance, has historically risen over the long term, yet it has experienced wide short-term fluctuations. How well would you have handled the 1973 to 1975 recession, when the stock market dropped by 46%, watching your accounts go down by nearly half?
· Financial Goals and Planning Horizon. Probably the most critical consideration is how many years you have to meet your financial goals. Generally, the earlier you begin saving, the more risk you can afford to assume. Though you should never take on more risk than you are comfortable with, you should also recognize that the amount of risk you are willing to carry affects the return you can potentially expect to achieve. Generally, the greater an investment's possible reward over time, the greater its level of price volatility, or risk. With time on your side, you may find it's easier to weather the ups and downs.
Knowing your risk comfort level can prove invaluable when you make investment decisions. With proper planning, you can develop a portfolio that balances your risk tolerance with your financial goals. Since risk tolerance changes with time and circumstances, it’s also a good practice to reassess your investment strategies as you start a family, approach retirement, or experience other major life changes. The good news is that SAVVI will align your goals and time horizon to help you manage risk appropriately.
Diversification is Key
A diversified investment strategy represents different sectors of the financial markets, such as stocks, bonds, mutual funds, and cash instruments, consistent with your financial goals and time horizon. Although there are no guarantees, it is widely believed that different asset classes rarely all move in the same direction at the same time.
Investors seeking the relatively higher rates of return that may come from investing in equities should also be mindful of diversifying within this asset class. Equity-based portfolios have a wide range of options to choose from including individual stocks and stock funds in large-, mid-, and small-cap companies, foreign and domestic firms, and individual sectors, such as biotechnology, health care, or utilities.
An Important Exception
The recent CARES Act legislation allows you, if your plan allows, to take out up to $100,000 of your retirement account before age 59 1/2 without the usual 10% penalty and mandatory withholding, as long as you pay back the distributions within three years. Current 401(k) participants can take loans of up to $100,000 or up to 100% of the account balance with no repayments due for one year. This special tax treatment is available to any individual, or their spouse, who have lost their job, been furloughed, had reduced hours, or been otherwise unable to work due to COVID-19. Generally speaking, these hardship withdrawals or loans should be avoided unless absolutely necessary, particularly because withdrawal may mean selling assets at a now depressed valuation.
Loans may impact your withdrawal value and limit participation in future growth potential. However, if such a loan or withdrawal could mean saving your home or feeding your family, it’s a viable consideration. These balances do need to be repaid. Be aware of the potential impact if you are unable to pay back the balances and would incur penalties down the road.
With a well-diversified portfolio consistent with your goals and objectives—and a long-term outlook—the wisdom of the day is to stay your investment course. Resist the temptation to try to predict the market’s gyrations, even amidst a global pandemic. Continued involvement, while using a long-term investment strategy, will serve the long-term investor far better than trying to anticipate the ultimate direction of the market based on the current emotional temperature of the investing public. As we’ve said before and will hear again, “This too shall pass.”
If you've been financially impacted by the Coronavirus crisis, click here to fill out our interactive questionnaire and determine whether you qualify to receive a no-cost, targeted financial plan from SAVVI. The SAVVI plan will take into account the effects of the immediate crisis to help you navigate this difficult time, as well as help you keep working toward your future retirement goals.
SAVVI Financial LLC (‘SAVVI’) is an investment advisor registered with the Securities and Exchange Commission. SAVVI does not guarantee investment results and past performance is no guarantee of future results. Information provided is for educational purposes and does not constitute investment advice, which is only provided to registered users who have a valid Investment Agreement in place with SAVVI. No information on this presentation should be construed as an offer to buy or sell any security or insurance product. SAVVI is not a certified accountant, lawyer, tax professional, or HR professional. Nothing in this document may be considered as tax, accounting, employment, or legal advice. Please consult with your accounting, tax, human resources, or legal professionals before taking any action.