Though financial markets have fluctuated in recent times, an investor with a solid long-term strategy likely doesn’t need to worry. In many cases, the best advice is to keep calm and carry on.
“During times of uncertainty the last thing you want to do is overreact,” says Vincent Finney, managing director of investments for Bibler Finney Panfil Private Wealth Management Group of Wells Fargo Advisors.
What’s more, conditions may not be as uncertain as they seem. Since the 1920s, Finney says, the market has averaged a 13 percent pullback each year.
Pulling money out of investments during a downturn in the market can often lead to investors missing out on gains from some of the best days, which often follow the bad days, Finney says.
The best way to avoid this is by sticking with an investment strategy. Historically, the stock market averages a return of around 10 percent. That average speaks to returns across time though, a given year may give a much different return.
The key is distinguishing what money is needed in the short versus long term. One way to think of it, says Ryan Bibler, managing director of investments for Bibler Finney Panfil Private Wealth Management Group, is keeping money in separate buckets based on when it might be needed.
Bibler recommends thinking of investments in three groups:
Short term – Money that may be needed in one to two years, often for purchases such as a new car or to cover a gap in employment. These assets should be easily liquified.
Intermediate term – Money that may be needed in two to five years, often for home down payments or supporting a child through college. Commonly held in bonds.
Long term – Money that won’t be needed for five or more years, for future planning and retirement. Commonly held in stocks.
Shorter-term financial needs should be kept in relatively stable investments, but once those needs are met an investor can more readily take on risk with long-term investments. A market downturn is actually an ideal time for those investments.
Investing while the market is low leaves room for greater anticipated growth, which Bibler says can help offset losses from the initial drop in the market.
“As long as you have your liquidity needs met, adding risk has proven to be a great call,” Bibler says. “Odds are you’re not going to catch the bottom, but if you have enough time to let that money work, you’re really bringing your portfolio, by adding risk in downturns, back to whole a lot sooner than if you did nothing at all.”
Predicting when a market will rise and fall, though, can be treacherous. One approach is dollar-cost averaging, where an amount of money is invested regularly across time – how most people invest for retirement. Rather than guess the best time to invest, that method consistently invests in incremental amounts, generally leading to a return near the market average across time.
If an investor has a strategy in place, these market dips can be fertile times rather than causes for concern.
“The investors that are set up properly, they shouldn’t be worried,” Bibler says. “They should be looking at these downturns as an opportunity, an opportunity to add and buy stocks when they’re on sale.”
Harvesting Losses
While pulling money out of investments during a drop in the market is generally not advisable, moving investments can have benefits. Drops in the market offer opportunities to harvest tax losses that can later be used against capital gains. An asset can be sold while at a loss and the proceeds from that sale can be reinvested in a comparable asset.
“Those similar investments will recover,” says Joseph Panfil, managing director of investments for Bibler Finney Panfil Private Wealth Management Group. “Now you’re giving yourself a tax loss that you can use against any gains in the future.”
While this is often done at the end of the calendar year, Panfil says there’s no need to wait if the opportunity presents itself earlier.
Cameron Carr is an editor at CityScene Media Group. Feedback welcome at ccarr@cityscenemediagroup.com.
