15 Mar Stocks: Should I stay or should I go?
Q. With all the drops for stocks, I’m nervous about my investments. I’m about 60 percent equities and 40 percent fixed income, all mutual funds, and I have 15 years until retirement. Should I just stay put?
A. Volatile markets like these can certainly work to test one’s resolve in maintaining a focus on the long term.
If you don’t have the right portfolio for your goals and your risk tolerance, you’re going to feel the roller coaster ride even more.
If you’ve selected the right portfolio, it’s important to stick with that plan during periods of market volatility.
So what makes a “right portfolio?”
One of the biggest considerations should be your personal time horizon for those monies, said Michael Cocco, a certified financial planner with AXA Advisors in Nutley.
“The current market volatility we have been experiencing over these last few months have given many investors cause for concern, but if you have a long-term time horizon — especially if that is 10 years or more — this may actually have very little impact on your retirement nest egg, even though it may not feel like it now,” Cocco said.
If you have 15 years until retirement, hopefully you are trying to contribute some money each year to your retirement accounts, he said.
During market pullbacks, Cocco said, one can argue that certain stocks may be “at a discount” and any new monies you are adding to your accounts could be buying in to your investments at a lower share price, which may potentially lower your overall average cost per share.
Consistently investing a set amount of money into a set investment at pre-determined intervals is a concept known as “dollar cost averaging” and is a popular strategy for some people looking to invest for the long-term, he said.
“Sometimes investors will come to me and say, `The stock market has been so bad that I am adding in money each month to my account, yet my account keeps going down. I am going to stop adding any new money until things get better,’” he said. “This, in my opinion, is the worst thing you can do.”
Cocco said when the market has pullbacks like this, the money you invest will purchase more shares of your investment of choice at a lower price point. You ultimately want to buy low and sell high, and not the other way around.
Although dollar cost averaging seeks to lower the average price paid for an investment over time, Cocco notes that it does not guarantee any profit and will not act as a protection against loss in declining markets. If you are interested in this strategy, you should consider your ability to consistently invest funds, particularly in declining markets, he said.
To weather choppy markets, you should make sure that both the stock and bond funds you are invested in are well-diversified across both U.S. and international markets, said Charles Pawlik, a certified financial planner with Lassus Wherley in New Providence.
He said you need to remember that diversification doesn’t just amount to owning a lot of different mutual funds.
“The mutual funds should represent several different asset classes such as U.S. large-cap stocks, U.S. small-cap stocks, international developed stocks, as well as emerging market stocks,” Pawlik said. “Low-cost index funds are a good starting point to gain broad-based exposure to these various asset classes, such as investing in a fund that tracks the S&P 500 index as a way to gain exposure to U.S. large-cap stocks.”
Pawlik said assuming you have a well-diversified portfolio of mutual funds, history tells us that you typically are not well-served by repositioning your portfolio in reaction to market volatility, despite the fact that it can be tempting to do so.
“By selling out of stock investments during a downturn, you effectively lock in the losses that you have on paper by selling at lower prices,” he said. “If you aren’t invested in the market as it recovers, you don’t give yourself the opportunity to get back the dollars you have lost.”
At the same time, Pawlik said, remaining invested but reducing your overall exposure to stocks during a downturn can provide a significant headwind in recovering the dollars you have lost.
But that can be a tough call.
Pawlik said timing the market — in terms of reducing stock exposure to try and avoid further losses and then attempting to repurchase ahead of a stock market rally — is not something the overwhelming majority of investors have been able to do successfully and consistently.
“With a long-term time horizon for investment and assuming a well-diversified portfolio, it is important to maintain exposure to stock investments so that you can participate in the positive moves when markets rally,” he said.
Pawlik said the cornerstone of a sound long-term investment plan is a strategic asset allocation. The asset allocation sets targets relative to what percentage of your portfolio should be invested in various asset classes, such as U.S. and international stock and bond investments, real estate, and other alternative investments.
He says a Certified Financial Planner® can assist you in determining the proper asset allocation/mix of investments, implementing a well-diversified portfolio, as well as managing your portfolio to the desired mix of investments on an ongoing basis.
Then as your portfolio fluctuates with certain investments posting better returns than others, Pawlik said it’s important to take advantage of opportunities to rebalance your portfolio back to the initial targets set for your long-term asset allocation.
For example, if a 60/40 split between stock and bond investments is the appropriate/desired mix, that mix will change over time as the market fluctuates. During downturns in equity markets, the stock portion of your portfolio will typically drop down to less than 60 percent of your portfolio, with the bond portion of your portfolio typically increasing on a percentage basis.
“If your long-term investment plan calls for a 60/40 split between stocks and bonds, this would provide an opportunity to rebalance by selling bond investments at higher prices and buying stock investments at lower prices to return the portfolio to that 60/40 mix,” he said. “This strategy amounts to a disciplined way of following the cardinal rule of `buy low, sell high,’ and maintaining a long-term focus, when we are tempted to do the exact opposite during market downturns.”
Your overall asset allocation should be revisited periodically to ensure it is still appropriate based on your current situation and overall goals and objectives, Pawlik said. However, repositioning in reaction to a stock market downturn could potentially provide a significant headwind relative to accomplishing your long-term goals.
Cocco said as someone who has 15 years until retirement, one could argue that your current allocation of 60 percent equities and 40 percent fixed income may be too conservative.
He said fixed income investments, or bonds, have a role in a portfolio to help control volatility and provide a measure of stability, but they have a long-term historical return that is far less than stocks, citing Ibbotson/Morningstar. For this reason, Cocco said, you may be better served with a higher percentage of equities in your portfolio, and lessen that equity exposure as you near retirement.
He suggests you discuss all aspects of your financial picture with a professional before making any investment decisions.
Also note that the long-term average annual return for stocks has been roughly 8 percent per year over the last 40 years — but the stock market very rarely returns near 8 percent in any one year.
“Of course, past performance cannot guarantee future results, and there are many years that have returned much more than that, but also many years that have returned much less than that,” Cocco said. “No one knows when the up years will come or when the down years will come, which is why `staying the course’ is often the best strategy.”
“I always tell my clients that in these periods of volatility, let’s not let these short-term market fluctuations interfere with our long-term strategy,” he said.
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This story was first posted in March 2016.NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.