Is Your Portfolio all RED?
The Second Quarter (April -June 2020) was the worst quarter for economic growth in US history. Also, not forgetting that the unemployment jumped from historic lows of around 3.5% in Q1, to nearly 15% in Q3. Another all-time record. Clearly things are appearing messy.
The S&P 500 is 9½ years into the bull market, making it the longest ever. It has risen by 336% from its March 2009 lows. Everyone wants to know how much higher and longer can this bull run go. The CBOE VIX called (Volatility index) which is a gauge of fear in the market has risen above 20, which is its highest since April 2018. When the markets fall, investors fear and try to get rid of their holdings to minimize further losses, but in reality, it makes little sense in the long run if you follow a defined plan. When the market turns, volatile one must have an investment plan and should stick to it. People fret about rising volatility but are not prepared to handle it. Having a financial plan tailor-made to achieve your goals and objectives will help and also provide an opportunity to earn a better return.
Here are a few suggestions for your long-term plan:
- Selection — One must choose those asset classes to which the investor is comfortable with and suits your risk profile rather than putting money into something trending.
- Do not time the market- Investors usually try to time their entry and exit and often end up paying more on brokerage fees. Research studies conducted by Morningstar show that the returns that an investor gets by timing the entry and exit are worse than what he would have earned if he had simply bought and held the same funds. (Morningstar, Mind the Gap 2019)
- Regular Investments- Investing in periodic intervals (weekly, monthly, yearly) will not create much impact on your portfolio performance. One can avoid the vulnerability caused because of market timing by investing regularly. If one invests through downturns, it would not guarantee a higher return but may benefit in the long run. When the market falls, the prices of investments fall, and these contributions allow you to buy more number of shares at the same amount.
- Tax Benefit- If one wants to move money from traditional IRA or 401(k) to a Roth account, a downturn helps as it would create a lower tax bill.
- Many people who are nearing retirement should take some profit during rallies to reduce your equities position. Investors should become prudent and wise, not reckless.
- Don’t manage everything by yourself- because of the market volatility the mix of equities, bonds, commodities, etc. would have changed, to which one may want to get back to the desired mix by rebalancing. It is a complex process to rebalance and you may need to consult an advisor before making any investment decision. A professionally managed account for longer-term goals like retirement provides a specific asset allocation mix based on the individual risk appetite.
In a nutshell
Instead of worrying about the rising turbulence and trying to time the market, it makes sense to adopt a disciplined approach by sticking to an optimized investment plan and make use of the opportunities in the market. That’s it from our end. Until next time!