Volatile stock markets occur periodically. We can tend to forget this fact, given that the broad market averages do very well historically over time. During the 2011-2020 period, for example, the S&P 500 appreciated an average of 14% every year. However, only one of those ten calendar years ended up with a stock market return close to 14%, a reminder of the inherent fluctuations.
But recently, we have a vivid reminder because those broad averages have fallen into bear market territory. The corresponding fall in their portfolio’s value can prompt investors to ask questions about their investments. Fortunately, a fiduciary financial advisor in Atlanta, GA, welcome questions during volatile markets like these, and at any other time.
Here are some frequently asked questions and brief overviews of their answers.
This article explores these topics:
In our 50+ years of helping investors we’ve learned this: prudent investment strategy is determined by multiple factors, not just what the stock market is doing in a particular time frame. Those factors include your goals, the timing of your goals, your age, your income, your risk tolerance, and more.
Your goals and their timing are probably the two most important determinants. For example, are you in the market seeking to maximize your retirement savings over the next two decades? If that’s the case, patience may be your biggest asset.
Although you likely feel you want to reassess your specific investments in times of volatility, it is often best to simply hold your course. Stocks, over time, appreciate more than almost any other asset class.
On the other hand, if you are investing toward a short-term goal, such as a down payment on a home, the stock market is likely not your best option for funding those investments. Why? Because periodic downturns are an expectable part of stock market investing.
Market downturns are rooted in human nature and they extend back in history about as far as you might care to look. So, they can happen at any time. Therefore, you don’t want to be exposed to lose a short-term nest egg in a bear market. Cash (or possibly some bonds) is likely the better asset class for short-term financial goals (of one to three years).
The trade-off between short- and long-term investing depends very much on your age, time horizon, and objectives. For example, for anyone more than 10 years from retirement, funding your retirement nest egg is probably a “long-term” goal. However, it’s a shorter-term goal once you enter your immediate pre-retirement years (and may remain so during your retirement years).
That’s the reason why many financial advisors recommend that pre-retirees and retirees change their asset allocations in retirement accounts to some increased emphasis on bonds and cash instruments (rather than stocks) as retirement nears. Bonds and cash are much less risky.
Holding a larger percentage of bonds and cash in the years and months prior to your retirement protects you from an unforeseen downdraft in the stock market that might strike right at the moment you choose to forego a regular paycheck. The alternative is potentially having to live with a more drastic reduction in your nest egg.
Shrinking retirement funds can potentially cause disruptions to your retirement plans, including having to postpone the date or even having to return to work.
Most retirement investors need to know that there are three major asset classes: stocks, bonds, and cash instruments.
Stocks are the riskiest, at least in a short-term sense, as they are subject to periodic bear markets. Of course, a single company’s business performance can also affect its prices: a poorly performing company’s stock can lose value, even in an otherwise robust market. But if your stock market exposure is diversified across many companies and industries, this single-company risk is reduced.
Through a longer-term lens, the broad-based U.S. market indexes have appreciated the most of any asset class over the last century given time. This is still the case, even when you allow for the inevitable declines that occur.
There’s also a risk in becoming “de-invested” from stocks, too: missing out on potential appreciation. From our work with over 2,000 families, we understand well that sometimes people want to panic-sell an asset that is temporarily down in price, only to miss out on what might be a record-breaking rebound later down the road. The moral of the risk-reward equation for stocks: they work well over the long-term.
Bonds’ prices normally fluctuate less than stocks, providing pricing stability in a portfolio along with the interest payments. The price of bonds generally rise and fall conversely with interest rate movements. Most investors are aware that over the past decade, bond interest rates have been historically low. But even when interest rates have been higher, it is rare for bonds to provide higher returns than stocks once you are considering investment periods of five-to-ten years and longer.
Cash and cash-equivalent investments normally provide the most pricing stability since the price of cash in savings accounts and certificates of deposit (CDs) doesn’t normally fluctuate at all. Investors receive interest on cash accounts. Again though, interest rates have been at historically low levels for the past decade.
Even examined against longer term history, the risk of holding too much in bonds or cash is that your interest may not keep pace with inflation (which historically runs at about 2-3% annually and has recently been higher). Thankfully, multiple methods exist to minimize risk in all of these asset classes.
As far as stocks are concerned, an experienced and trained fiduciary financial advisor might recommend blue chip, dividend-paying ones, for example. Their steady dividend yield can mitigate some impact from stock price declines. This could be important for investors that are closer to retirement or actually in retirement.
For bonds and cash, your financial advisor can help you invest in the highest-yielding accounts possible to minimize the risk of inflation outstripping interest rates. The caveat here is that some higher-yielding bonds may also be riskier in terms of price stability.
These risk-reward choices are highly individual and depend very much on your personal risk tolerance and situation. As a result, the best approach is to talk to an Atlanta fiduciary advisor.
It’s a good idea to approach this question and consider your portfolio by its individual asset classes. Some of the recent stock market sell-off is due to the decision by the U.S. Federal Reserve to hike rates from historically low levels. This will eventually result in higher interest rates on both bonds and cash investments.
Increases in rates could actual help increase the value of your portfolio holding significant amounts of bonds and cash, given time. At the same time, using stocks to grow your portfolio’s value during a bear market presents some challenges. Investors need to understand, again, that stocks are subject to periodic decreases in price.
But, despite stock price declines, it’s also important to note that when you own stocks, you own equity in the underlying company. So, if the company is on a solid financial footing, its profits should rise over time. Stocks’ value typically reflects increases in profits. Stocks are best for the long-term.
Regaining the value of well-positioned and well-managed stocks seldom happens overnight. It takes time in a bear market. That’s why these financial investments are for the long-term.
You can speak to your Atlanta financial advisor about individual stock and mutual fund choices. Remember, as well, that some companies, sectors, or industries are struggling because of economic and pandemic-related supply chain conditions (global conditions or even management issues). Their troubles could prove short-lived in the long run.
Historically, the broad-based market averages do rebound in price and climb even higher. Therefore, if you sell during temporary volatility, you’ve lost your chance to regain your losses (and, potentially, reap the gain from further increases).
Remember: stock market losses and gains exist only on paper until you sell. This is why they should be held for the long-term. Another asset class might be more prudent if you have short-term investment needs. Our firm’s Chief Investment Officer is Ryan Patterson, CFP, CFA. He likes to say, “Panic is never a strategy!”.
A fiduciary financial advisor should always strive to put your best interest first by maximizing returns and minimizing risk, given your goals. At Linscomb Wealth, as fiduciaries, we seek to do this habitually, and make it part of our process. Contact us for answers specific to your goals, risk tolerance, and situation. We have an experienced and qualified financial planning team ready to meet, right here in Atlanta.