“I’m sure you’ve heard the saying, remove your emotions from investing. In the turbulent times that we are in right now, that is easier said than done. Statistically speaking we have seen a market/economic behavior similar to this before and likely will continue to see it in the future. How you react will determine what your financial situation looks like long-term,” offers Matt Nelson, Managing Director/San Antonio Market.
Past major downturns and headlines In the past 20 years, we've lived through two major downturns in the market and economy that many thought we would not recover from. We had the tech bust or dot com bubble and 9/11 in the early 2000’s. Then we had the global financial crisis in 2008-2009. We did recover from these major events with the longest bull market in stock market history and a robust economy with low unemployment.
Market volatility – sticking to your plan The last 31 years have provided an average intra-year drop of -13.5%, yet annual total returns were positive in 25 of those years (80% of the time). “Timing the Market” typically makes recovery harder – if not impossible. Over the past 20 years, the best 10 days in the market have been essential to growth. Seven of those 10 days occurred within two weeks of the 10 worst days according to J.P. Morgan Asset Management. While periods of sharp selling and investor angst is hard to stomach, we urge investors to keep a long-term perspective and avoid panic selling. Whether you own a business, work for a small business or a Fortune 500 company or are retired, having a financial plan in place and sticking to it can create calmness during volatility and times of uncertainty. Building the historic data into your financial plan can give you peace of mind. If you already have a plan in place, stay committed to it.
Why is rebalancing so important during big market selloffs and gains? Rebalancing your portfolio is crucial during big market moves. If you have a 60% equities and a 40% fixed income allocation, big market moves in either of these asset classes can dramatically change this allocation. If the 60% in equities (due to equity selloff) gets reduced to 45%-50%, when equities recover it typically takes longer to recover, as you did not have the same percentage in equities as you did during the selloff. This may happen in a long bull market as well, where the equities percentage may get much higher than the desired 60%/40% allocation. Thus, you may have 70%-75% equities - more aggressive than you intended. Rebalance your portfolio, especially when it has drifted away from your financial plan and desired allocation.
Are you truly diversified? We find that so many people think they are diversified by owning stocks, bonds and mutual funds. Now is a good time for everyone to complete an analysis to see if they are truly diversified into all asset classes and invested properly. Unexpected risks like the COVID-19 pandemic are impossible to predict. However, it’s times like this that highlight the value and benefits of focusing on true diversification and quality investments. In the past months, we have seen sharp declines in all major asset classes. Alternative investments sometimes get overlooked and may be worth exploring.
Are you positioned for the future? I am a firm believer that we will recover from this downturn. It is important to stick to your financial plan, don’t make irrational decisions, and assess if you are truly diversified and invested going forward based upon your risk tolerance and objectives.
The commentary is (1) not necessarily the opinions of PCIA, (2) for informational purposes only, and (3) should not be acted upon as individualized investment advice. Please call our office at 830-816-5131 to discuss any of these topics.