Thriving in Turbulent Times
December 9, 2022
Many investors today are survivors of the 2008 bear market and financial crisis, and most all experienced the 2020 COVID market collapse. The emotional and financial toll of extreme market volatility can influence investors for the rest of their investing lives. For younger investors, the dollar impact may be less pronounced, but for all investors, navigating turbulent markets takes discipline, fortitude and a strong stomach.
At Summit Place, our client portfolios have historically protected capital better than the broad market in significant market declines. We have achieved this protection through careful and individualized asset allocation and an unwavering focus on our investment discipline. You, too, can stay on track to reach long-term goals by embracing a consistent investing strategy. Our four steps to thriving in turbulent times can help you stay on course and provide greater peace of mind when market gyrations have you worried.
1. Review your market history
Stocks regularly move up or down 2-3% and most investors rarely notice these mild swings throughout the week, month, or year.
Since 1990, each year there also has been an average of 3 declines of 5%. Each time, however, the market has fully recovered the loss. According to S&P Capital IQ, the market has generally recovered a 5-10% pullback in about a month. Corrections, where the S&P 500 loses 10-20% of its value, have taken on average 5 months to recover. Most investors will experience a number of these in their investing lifetime and will reverse their losses fully by staying committed to their investment strategy.
Even total meltdowns like 2008 – investors’ greatest fear – have retraced their full decline, on average, in a few years. Total meltdowns don’t happen very often, but when they do, investors who don’t have a long time horizon can really have their life plans derailed.
No matter how big the decline, it’s important to know the market’s volatile history when investing, so you can put declines in perspective. When you understand the history of declines and recoveries, you might find it easier to remain focused on your investment plan.
2. Focus on the fundamentals
Do you know why you own the investments you do? Successful long-term investing includes knowing what facts about a company or fund make it attractive to you, irrespective of price. Fundamentals start with economic indicators that inform an overall view of our economy’s current strength and potential future growth.
Fundamentals also include all the facts about your investments. What industry is the company in? How is the company positioned competitively? What have been the most recent financial results and what are the projected financial results? What is happening at the company that makes the future look interesting to you? Fundamental analysis is essentially getting down to the basics and focusing on creating a full picture of the investment to determine its value. Cash flow, asset returns, the history of profit retention, future growth potential, new product cycles and capital management are all pieces of a company’s fundamentals.
When the stock market becomes volatile, it is best to go back and review the fundamentals for each of your investments. Has anything actually changed besides the price of the investment? If not, maybe it is a bargain to buy more today.
If a stock market correction eventually leads to an economic slowdown, then perhaps the fundamentals will change. When this is the case, it’s important to re-evaluate the investment for its updated value before deciding whether to make a switch to another investment.
Finally, reviewing fundamentals also does include looking at the history of your investment in the stock market as to its value. Since we know that markets regularly correct, it is useful to look at how the investment has been valued in the market over time. How did the valuation change in the 2008 market meltdown? How high did the valuation get before COVID hit? What has been the recent valuation of the investment before the current market volatility? By reviewing all the fundamentals of your investments, you can gain confidence to stick to your long-term investment strategy regardless of the market’s short-term action. You may even find there is a buying opportunity.
3. Look at tax management opportunities
Since the recent bull market was the longest in history you may have accumulated large unrealized gains in your portfolio. Perhaps you have even held onto investments that were not as attractive as they had been simply because you were trying to defer some capital gains taxes. When markets turn down, harvesting tax losses can create an opportunity to reduce other capital gains in your portfolio.
The first step to harvesting a loss is to isolate the stock with a loss that you want to use to offset current and future investment gains. Even if you have concluded that you still want to own the investment, you can sell it today to capture the loss and repurchase it in 31 days. The repurchase price becomes your new cost basis and the loss that was realized can be used against any gains this year and even used to offset gains into the future.
To avoid potentially missing a market rebound, you can buy any different investment that might have similar characteristics to hold during the 31-day waiting period. For example, if you have a loss in a recent purchase of Pfizer (PFE), you might sell the stock for the loss and buy Merck (MRK) to own for at least 31 days. This way, you maintain your exposure to pharmaceutical stocks during the month between your Pfizer sale and repurchase.
Capital gains on investments are taxed as ordinary income if the investment is held for less than 12 months. If the investment has been held longer than 12 months, the rate varies depending on your income and has a top rate of 20% plus a Medicare surcharge of 3.8%. Selling investments that are at a loss reduces the tax liability owed on these gains.
Before pursuing a tax-sale strategy, check in with your investment advisor and accountant to be sure the benefits make this the right strategy for you.
4. Remember your goals
The strongest way to stick to your investment plan is to stay focused on your long-term goals throughout both strong and weak markets. For younger investors with a longer time horizon, big downturns in the market offer opportunities to buy investments at discounted prices for the future. Regularly putting savings into the market, allows a portfolio to benefit from “dollar-cost averaging.” This means some days savings are put to work in an up market, but other days savings are invested in down markets at lower prices.
Investors who are planning to retire soon or who are in retirement may be looking at a different time horizon altogether, but their goals are even clearer. Portfolios need to replace income and support them for many years to come. Here, keeping that goal in mind can help maintain the discipline to stay invested in the market. Studies have shown that investors who miss even one strong up day in the market have portfolios that perform far worse than investors who stay invested the whole time a market is hitting low days. Investors who went to cash in March of 2020, for example, may have missed out on the rapid rebound in the following weeks and months.
Keeping an eye on investors’ long-term goals is a great way to look through market volatility. No matter if the market is up or down, recall what the portfolio will need to accomplish, and let that goal help maintain a commitment to the market.
Responding in uncertain times is possible
Most investors worry about the downside losses in their portfolio more than the upside gains. These fears often come bursting out during market corrections even as they know that investing in the stock market requires a long-term commitment. These investors often feel they have to do something when markets are gyrating. If you are such an investor, try following our four tools to maintain your investing discipline. By sticking to your thoughtful, disciplined investment strategy throughout turbulent times, your investments can still reach all your goals with a long enough time horizon.
Interested in further discussing strategies for your assets? Let us know!
Christine Crigler, CFP ® CPWA®