At the time of writing, the US stock market is on track to experience the worst first 100 trading days since 1970.
The Nasdaq is down 28% this year, the S&P is down 17.3%, and the Dow Jones is down 12.1%. It’s red as far as the eye can see. This has made many investors question their portfolios as investment performance has cratered.
But before reacting to the market, it’s time to have some critical conversations.
First, is this the right time to make adjustments?
As a rule of thumb, a bear market or market downturn is usually not the time to make adjustments to your portfolio for several reasons.
First, when the market is down, investors are often drawn toward more stable assets like bonds or cash. However, by adjusting your allocation while stocks are down, you sell stocks at low prices, locking in steep losses. And unfortunately, once you lock in those losses, the damage is done.
Instead, it’s typically wise to adjust your portfolio when it is up or neutral, selling stocks at higher prices to downshift your risk.
Additionally, if you’re adjusting your portfolio during a market downturn, it can be easy to swing too far the other way, letting fear get the best of you and forcing you into a sub-optimal asset allocation. Generally, you’ll get a better outcome if you evaluate your portfolio in a neutral or non-emotionally charged environment.
Second, we need to talk about your risk tolerance.
Risk tolerance is a fancy way of saying how much risk you can handle.
This is the first and arguably most essential conversation investors need to have with their local financial advisors when they start investing. Risk tolerance looks at factors such as your financial goals, age, investment timeline, and personality. All of these factors combine to help you determine the best asset allocation—the mix of stocks and bonds—for your situation.
Let’s walk through a few scenarios in more detail.
Imagine you have two people who want to start investing: Katie and Jessie.
Katie is 30, wants to invest for a traditional retirement at age 65, is very interested in finance, and feels confident that long-term investing yields successful results. Generally, she feels alright taking a more aggressive investment approach, even if that means volatility in the short term.
Jessie is a similar age, 32 years old, and is also investing for traditional retirement. But, unlike Katie, he feels that the stock market is a bit of a gamble. He’s not as interested in finance but regularly checks his 401(k).
While these two investors line up in many areas, like financial goals and investment timeline, they don’t align regarding their personalities and views towards investing.
As a result, if they both sat down with a financial professional to create an investment plan, they would likely get different recommendations. Often, a financial professional would recommend that someone in their 30s with roughly 3.5 decades before retirement have a fairly aggressive investment strategy—likely somewhere between 80 to 100 percent of their portfolio in stocks.
For Katie, that may be a great fit as she’s willing to take more risk and feels confident that the stock market will deliver the results she wants over the long run.
But for Jessie, the recommendations may be different. Typically, financial professionals would account for Jessie’s personality and views on investing and recommend something less aggressive—maybe aiming for 70 to 80 percent of his portfolio in stocks. This would allow Jessie to still reap the benefits of the stock market over the long run but also reduce the volatile swings along the way.
In the end, they both get a portfolio that should allow them to reach their financial goals while adjusting to their situation.
Ideally, as an investor, you have this conversation before you start investing and revisit it often to ensure that you are allocated appropriately.
Third, let’s talk about what you could be giving up.
As an investor, you have to be familiar with opportunity costs.
Opportunity costs are the value of the opportunities you miss out on because of a decision or action. For example, if you choose to step out of your career to pursue an MBA program that takes two years, the wages you could have earned in your job for those two years are your opportunity costs. Similarly, if you choose to sell your investments during a market downturn, there are opportunity costs involved.
And the opportunity costs may be much higher than you realize.
In other words, sitting on the sidelines could cost you big time. And unfortunately, no one knows when the ten best days could be, so staying invested is critical. So, while it can seem comforting at first to sit on the sidelines while the market takes a plunge, you have to realize that you could be giving up some of the best days of the stock market, a huge opportunity cost over the long run.
TrueNorth Wealth Is Here to Help
If you’re interested in working with a fiduciary CFP® professional to help you stay invested through good times and bad, then TrueNorth Wealth is here to help.
TrueNorth Wealth is among the top wealth management firms in Utah and Idaho, with offices in Salt Lake City, Logan, St. George, and Boise. At TrueNorth Wealth, we focus on helping our clients build long-term wealth while maximizing the enjoyment they receive from their money. We do this by pairing our clients with a dedicated CFP® professional backed by an incredible team.
For our team at TrueNorth, it’s about so much more than money. It’s about serving families all across Utah and helping them achieve freedom and flexibility in their lives. To learn more or schedule a no-cost consultation, contact us today!
