By Scott Kahan
It’s been a rough start for the equity markets in 2016. It’s hard not to panic and want to sell everything waiting for the markets to settle down. Wouldn’t it be nice to get a steady 4% return every year rather than all these ups and downs? Consider this: Since 1950, the U.S. markets have experienced a decline of between 5% and 10% in 35% of all calendar years; 20% of the time a decline of 10-15%, and 17% of our last 56 stock market years have seen downturns, at some point in the year, of more than 20%.
The very fact that stock downturns scare people is one reason why stocks deliver a higher return than bonds. Economists call it the “risk premium;” which is a form of compensation for investors who tolerate the extra risk–compared to that of a risk-free asset. Over their history, stocks have delivered higher long-term returns than bonds and cash.
But you should view your investments through a financial planning filter. Before you make changes to your portfolio, you should review your goals and objectives. If they haven’t changed, then there is probably no reason to make major portfolio changes. It may be a good time though to rebalance your portfolio based on your overall goals and objectives.
Market downturns give an advantage to those who are willing to practice disciplined re-balancing among different asset classes. Basically, that means that when stocks go down, any new cash goes disproportionately into stocks to bring them back up to their former share of the overall portfolio. This approach takes the emotions out of investing.
If you’re accumulating for retirement by putting money in the market every month or quarter, each downturn means you can buy shares at a bargain price while many other investors are selling out at or near the bottom. Over time, as the market recovers, this can give a little extra kick to your overall return.
If you are in retirement, you should have 12-18 months of liquid funds available in a money market so you don’t have to sell when prices are low. As you rebalance during the year, you fill that cash “bucket” to maintain the needed liquidity.
If you are focused on your financial planning, then market downturns should not be a time to panic, but rather viewed as a normal occurrence and possibly an opportunity.
Scott M. Kahan, is a Certified Financial Planner® professional and President of Financial Asset Management Corporation, a fee-only wealth management firm located at 26 South Greeley Avenue in Chappaqua. Call 238-8900 or write to firstname.lastname@example.org.