06 Dec With the omicron variant, should I get out of the stock market?

Q. With this new COVID variant and the market nervousness, I’m wondering if I should get out of stocks so I don’t lose more – at least until we’re out of the winter and any COVID spikes. What do you think? I’m 50 and not retiring any time soon.
— Investor

A. Yours is a timely question.

But you have to think of the big picture, especially because you’re not retiring tomorrow,

You have 17 years before you stop working, assuming you’re planning to hold off until you’re eligible for full Social Security retirement benefits, said Jeanne Kane, a certified financial planner with JFL Total Wealth Management in Boonton.

She said during that time the market will go up and down.

“I feel very comfortable saying that 17 years from now, it should be much higher,” she said.

Here’s why.

On average, the S&P 500 grows about 10% per year.

Also on average, one out of every four months, the stock market will go down, she said. One out of every four quarters, the market will go down. And one out of every four years the market will go down, she said.

“This means that three out of every four months, quarters and years, the market will go up. To participate in those months that go up, you need to consistently be in the market,” she said.

Kane noted that market timing involves getting in and out of the market at the perfect time.

“I’ve not met a person who can do that consistently, especially when they do it part-time,” she said.

She said for those who pull money out of the market out of concerns that it will go down — or who pulls money out after it does go down — the big question to answer is: “What am I going to do with the money that I take out of stocks? Put it in the bank?

That’s probably not a great choice.

Inflation rose 6.2% in October from one year ago.

You’re going to lose money by putting it in a bank account making less than 1% per year in interest, Kane said.

She said as an investor, there are two essential things that you need to look at when it comes to how you invest your money: time horizon and risk tolerance.

For time horizon, you need to ask yourself when you need the money. The sooner that you need the money, the less likely it should be in the stock market, she said. At the same time, if you were retiring tomorrow and the market dropped, you would be selling stocks at a discount to fund your retirement which is not a successful strategy, she said.

“You’re not going to need your money for 17 years. If the market drops tomorrow, you’ll have 17 years to recover from that loss,” she said.

Then there’s risk tolerance.

Ask yourself how much of a drop in market can you take before you want to change your strategy.

“If you are someone who wants to sell their shares every time the stock market goes down, you are not invested in the right stock allocation for you,” Kane said.

Your goal should be to get the highest rate of return given your risk tolerance. This means that you are willing to maintain your long-term strategy and weather the ups and downs of the market along the way, she said.

“Otherwise, you are making tactical decisions with your money, which means that you need to be able to time when you get in and get out of the market,” she said. “This is incredibly difficult to do.”

Once you understand your risk tolerance and time horizon, you need to determine your investment strategy. You will have short-, medium- and long-term needs for your money. Each should have a different investment strategy, Kane said.

Short-term needs would cover items like living expenses, car payments and your mortgage, Kane said.

This is not money that you should be investing, she said.

“It should be `liquid’ which is another way of saying that it can easily be converted to cash,” she said. “This money should be in a savings account at your bank or in a money market account. Your investments may only earn a little, but you will have money available when you need it.”

Next come your medium-term funds, which would cover costs in five to 10 years.

This could be to cover college tuition, weddings for your kids or a home down payment.

“Here we would be looking at a more moderate investment strategy,” Kane said. “For example, a moderate strategy could be composed of 60% stock and 40% bonds. The stock portion is designed to grow and outpace inflation and the bond portion is there to provide some stability.”

Finally, there are your long-term funds, which would be for retirement, long-term care costs or even a dream vacation.

Kane said these funds are where you can be more aggressive.

“An 80% stock portfolio will give you more growth potential than a moderate strategy,” Kane said. “It will have higher risk associated with it. But you have a long time to recover from any losses since you won’t need to access the funds for at least 10 years.”

It is important to review your time horizon and risk tolerance on a regular basis, or at least annually, she said.

You should also do a review if there are major life changes, such as a new job or retirement, a marriage, death or having kids or if your health changes, she said.

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This story was originally published on Dec. 6. 2021.

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.