4 Things You Can Do Now

People tend to only talk about volatility and investment risk when the market drops. Investing when the market is going up is fun and easy, but what do you do when the market drops and there is no end in sight to when the losses will stop? Right now, we are in the middle of the fasted bear market in history. Investors are worried that the Covid-19 virus and the Oil War are going to cause a continued economic shut down and push us into a deep recession.

Fastest Bear Market In History

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If the past few weeks have taught us anything, it is how fast the market can move. With the average daily swing during this bear market much larger than ever seen. The S&P 500, for instance, had seven consecutive days with daily moves larger than 4%, beating even the record in 1929.

So, what can you do when the market drops? Here’s a look at the 4 things you can do now.

AVOID PANIC SELLING

Selling stocks in panic is the worst thing you could do after a stock market crash. Successful investing is about buying low and selling high. When you sell after a crash, you do just the opposite. Panic selling not only locks in losses but also puts investors at risk for missing the market’s best days. Looking at data going back to 1930, Bank of America found that if an investor missed the S&P 500′s 10 best days in each decade, total returns would be just 91%, significantly below the 14,962% return for investors who held steady through the downturns.

REVISIT YOUR FINANCIAL PLAN

WHAT IS A FINANCIAL PLAN?

Financial planning is very important in bull markets but becomes vital in bear markets. A financial plan is a comprehensive overview of your financial goals, the steps you need to take to achieve them and often include an investment plan. It is answering the question, “what is the purpose of your money?” and putting a strategy in place to fund that purpose and an investment approach that is based on each individual goal. The financial planning process involves a number of steps, and it is important to come back to these steps especially during volatile markets. Those steps include:

• Identify your goals and the purpose of every dollar you have
• Design a plan to achieve short-term and long-term goals
• Analyze your risk tolerance
• Put together investment strategy tailored to each goal
• Review and update

When putting together a financial plan, that often entails running multiple scenarios of market performance. This usually means that bear markets such as 2008 or the Covid-19 bear market are factored in and your goals are still achievable weathering such markets.

REVISITING YOUR PLAN

Regardless of market conditions, it is always important to revisit your financial plan. In bear markets however, it is even more important. Revisiting your financial plan will help put the volatile market into perspective. In time where the market is falling, it is very difficult to think of a long-term plan. We recommend rerunning your financial plan in the worst of times. To see that your goals are still intact regardless of market movement will help reduce the stress that are caused by bear markets.

LONGEVITY RISK

For most investors, their number one financial goal is retirement. Retirement takes decades of saving, planning and investing. It is easy to see how the closer someone gets to retirement, the more concerned they are about the market crashing. This is the type of goal that takes time to accumulate assets for and According to the SSA, a 65-year-old has a life expectancy of 19.5 years. For a 65-year-old couple, there is a 1 –in-4 chance of at least one spouse living past 97 and a 1 –in-10 chance of at least one spouse living to 100.For some retirees, retirement could last 30 years or more and should now consider themselves as long-term investors, however when planning for retirement, 62% of retirees underestimate life expectancy.

Revisiting your financial plan can help avoid panic selling which could cause a under performance as discussed above. As we discussed in our “Retirement Income” post, a survey by Fidelity found that 40% of pre-retirees over the age of 55 said that they believed they could spend 7% or more per year without exhausting their assets. It is difficult to sustain that level of spending, while living longer and underperforming.

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REBALANCE

Rebalancing involves selling winning investments to put more money into investments that have gone down. Also known as buying low and selling high. During the financial planning process, you determined your risk tolerance and put together an asset allocation, which is a defined mix of different asset classes. Over time, as the market fluctuates, your asset allocation can shift outside of the parameters set in your financial plan. Say you have a portfolio with an asset allocation of 60% stocks and 40% bonds. If bonds have a great year and stocks fall, your balance will change. If bonds begin to represent 47% to 53% for stocks, you can move more money into stocks to rebalance. In a study by Vanguard, They Compared a hypothetical 50% global stocks/ 50% global bonds annually rebalanced portfolio versus a 50%/50% never-rebalanced portfolio: 1926 through 2014. As you can see in the chart below, rebalancing led to a 25% reduction in volatility, while impacting the rate of return by less than 1% per year.

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LOOK FOR OPPORTUNITY

When investing in bull markets, everyone wishes they could have bought a stock when it was at a much lower price they remember. For example, when the Dow Jones Industrial Average was near 30,000, most investors wished they could have gotten in when the Dow was at 20,000. When bear markets happen, it creates a buying opportunity to be selective and buy stocks that fit your long-term goals and objectives. It is important to understand that what has fallen to a certain price, can ultimately go lower. The goal for long-term investors is not to day trade in and out of stocks during a bear market. The goal is to strategically buy stocks at a more attractive price.

During bear markets, it is a great time to engage the help of a financial advisor. An advisor can help maintain discipline during stressful periods. Focusing on the progress to your financial goals is a lot less stressful than watching the swings in the market. Investing legend Bob Farrell‘s #10 rule still stands true today: “Bull Markets Are More Fun Than Bear Markets”.