While most financial advisors recommended staying the course when the news of the COVID-19 pandemic hit last March, many investors opted to sell off stocks and go to the safety of cash. If you’re one of the people who sold in the wake of the pandemic, don’t feel guilty that you may have missed out on some investment gains due to the timing of your decision. So much of investment theory is based on historical events, but there is no recent event like what we experienced over the last year or two. The level of uncertainty is high, and that, understandably, leads to the need for safety.
While the markets appear to be leveling off, there’s still the chance of continued volatility, but that doesn’t mean you shouldn’t start thinking of a plan to invest again. If you’re challenged by the prospect of deciding when the best time to get back in is, and how to do it the right way, here are some guidelines to use in making your decision:
Don’t Try to Time the Market
Get back in when you feel comfortable, but realize that it may not be the very best time. There’s no magic horn that sounds when the markets are ripe for getting back in. Just keep a watchful eye on where things are going and jump back in when you feel like you’re ready.
Diversify, Diversify, Diversify!
Yes, it’s true that you can diversify some extent of the risk out of your portfolio, but this takes some work. There are two levels of diversification you should pursue, which are at the portfolio level and the asset level. A smart mixture of Large Cap, Small Cap, and international stocks; fixed income securities; alternative investments and cash may help lessen the overall risk in your investment portfolio. This is because economic events do not affect all types of companies and securities the same way. You can further diversify by investing in mutual funds that own a large basket of companies or securities across many different sectors or a large portfolio of individual stocks and bonds.
Don’t Be Afraid to Be Extra Conservative
If you don’t feel comfortable with getting back in the stock market, consider fixed income investments such as bond mutual funds. These offer a diversified mix of bonds that typically have much less downside than stocks. Just know there is less upside as well.
Invest in Companies or Sectors That Make You Feel Comfortable
Not all companies and sectors have experienced as much volatility as others during the market turbulence of the past 18 months. Do some research and figure out what sectors seem to be less affected by what’s going on. You may feel safer this way.
Invest Over a Period of Time
This is called dollar-cost averaging, and it refers to the practice of investing a consistent dollar amount in the same investments over a period of time. It’s another way to manage your investment risk. It also eliminates the emotional component of deciding when to get back in the market. However, you’ll still need to do your research on picking the right investments to make this work.
Commit to a Long-Term Strategy
This is about picking a strategy and sticking to it. First, look at your risk tolerance and your time horizon. Then, determine the level of risk you want to take. Let’s say you’ve determined you feel most comfortable with a balanced objective (50-50 stocks-bonds) based on your risk tolerance and time horizon. Invest using that strategy and commit to staying the course—no matter what’s going on with the markets in the short term.
Work with a Professional
While this is the last thing on the list, it’s probably the most important. Managing an investment portfolio is like overseeing a construction project or planning a large event—to do it best, you should hire someone who does it for a living. There are many different factors you should consider when choosing a financial and investment advisor. Perhaps the most important is whether or not your advisor is legally obligated to make investment decisions that are in your best interests. This legal obligation is referred to as a fiduciary duty. Fiduciary is a word that simply means an advisor is required by law to offer financial and investing advice that’s best for the client—not for the firm.
Determining when and how you get back into the markets is ultimately up to you, but with a trusted advisor at your side, you can move forward with the confidence that you have a plan in place to work toward your goals.
All information herein has been prepared solely for informational purposes only and opinions are subject to change. Past performance is not indicative of future results and all investments involve the risk of loss of principal. For information on how these general principles apply to your situation, consult an investment professional.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in a declining market.
Series 65 Advisory Registration† Chris has more than 18 years of experience in the trust industry and specializes in post-death administration of estates and trusts. He understands that estate planning and administration can be an emotional time for his clients, so he focuses on getting to know the families he works with and understanding their specific needs—developing strong relationships based on great client service along the way. He administers trusts and other fiduciary...Read More