Stock markets are and always have been volatile, and to varying degrees - they go up and they go down, sometimes a lot, sometimes a little. In hindsight over the past decade, volatility may seem as if it were non-existent given the exuberant returns the market has experienced over that time frame. The truth is that volatility has always been there, and more often than you think.
Volatility has shown face once again, this time to a high degree due to fears over the coronavirus, and a crash in oil prices. What should you do or change now that it's back in whimsical fashion? While it may seem counter-intuitive, my answer is: nothing.
Many investors started their journey with the intent to grow their money to allow them to satisfy a specific long-term goal such as retirement. However, investors around the world are in a panic, and while no one knows how any of this will eventually play-out, investors are still making short-term investment decisions based solely on speculation of the unknown.
As I mentioned, this level of volatility is actually nothing new to investors. The day-to-day hot off the press media headlines and articles however are. With the information we consume daily at our fingertips on our smart-phones and televisions, we create a false sense of urgency amidst the noise; can we even begin to remember the last time something similar happened?
I have gathered some interesting visuals (reminders) from market history to help keep the rocky market action in perspective:
Key Tips & Takeaways
- Asset Allocation: Sometimes market volatility can be extreme, and the recent market roller coaster ride has been a great example thus-far. This is why asset allocation is an important aspect of investing. However, remember that asset allocation is an investment strategy that can help manage risk within your portfolio but it does not guarantee profits or protect against loss in declining markets.
- Dividends: If you are invested in stocks, there's a good chance some of those stocks pay a dividend. Dividend payments are not affected by the rise and fall of stock prices. Dividends from securities are paid on a per share basis. For example, if you own 100 shares of a company's stock, and the stock pays $.50/share, you will be paid $50 in dividends. If that same company's stock price falls 20%, your payment stays the same because you would still own 100 shares.
- You have not realized any gains or losses on investments in the stock market until you sell an investment. If you have not yet sold an investment that you hold, you will have gains or losses "on paper" - they are not yet realized. I often hear investors say that they lost everything in their investment accounts in the crisis of 2008 - 2009, and never recovered from it. The only way that could have happened is if the investor sold shares of their investments after the market had declined. If they had revisited the reason they started investing in the first place, and put short-term emotions aside, they probably would have held on to those shares until their prices increased once again. They had "paper losses" that they chose to realize by selling low. Don't be that investor.
- Tax-Loss Harvesting: Many investors - in a particularly common investment vehicle - will likely experience what is called "capital gain distributions" this year. These are taxable capital gains paid to investors even though they may not have sold any investments to realize those gains... You could use the recent volatility to sell your "bad" investments - that you were already looking to get rid-of or reduce regardless of gain/loss status - and realize a loss to offset those highly probable capital gains distributions that may hit come year-end. Contact your financial planner to see if you hold investments subject to capital gain distributions.
Another way to use tax-loss harvesting would be to sell your big losers - which may still be "good" long-term investments - to realize a taxable loss, then immediately buy/reinvest in a similar investment. This way you have a locked-in loss for taxes but get to keep your money invested for upside potential. Be careful of the wash-sale rules in this case. Again, work with your advisor on this. If you end up having no taxable gains for the year, you can still offset up to $3,000 against your regular ordinary income, then carry forward any remaining losses for future years. Note: Waddell & Reed and its representatives do not offer tax advice. Consult with your tax advisors regarding your individual situation.
- The market can go up, just as easily as it can go down.
- Market timing is impossible: An investor who missed only the 10 best days in the stock market over the past 20 years would have ended up cutting their long-term returns in HALF. Most of which came right after large down days.
- What to do: Growth oriented investors; keep putting money away in your investment accounts according to your long-term plans and take advantage of the lower stock valuations. You are inherently taking advantage of another investment strategy: Dollar-Cost Averaging. Note that dollar cost averaging does not ensure a profit nor guarantee against loss. Investors should consider their financial ability to continue their purchases through periods of low price levels. Income investors; Although it may seem difficult, hold tight and wait for the market to sort itself out. While you're waiting, keep collecting those dividend payments!
The Bottom Line
Educated investors have plans, and they stick to them. They and/or their advisors understand how and why they are invested. Trading on emotions in the short-term, and decision making during volatile markets is not for long-term investors; this is when large mistakes are made, and how long-term plans can become derailed. Only act on what you can control, your investment behavior. This is where your financial planner can add additional value to your investments and goals. With some strategic and holistic planning, a qualified planner can help you take advantage of times like these.
Cameron Valadez is a CERTIFIED FINANCIAL PLANNER™ in Riverside, California
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. It is meant for educational purposes only. It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions.
All investing involves risk and the potential to lose principal, and there can be no guarantee that any investing strategy will be successful. The hypothetical examples are for illustrative purposes only and should not be deemed a representation of past or future results. The examples do not represent any specific product, nor do they reflect charges or other expenses that may be required for some investments.
The S&P 500 is an unmanaged index which cannot be invested into. Past performance is not indicative of future results. 03/20