It’s been a rocky start to the year. Through the first 10 days in May stocks are down about 15%, and bonds have dropped as well. Investors have concerns about inflation, rising interest rates, a potential downturn in the economy, and the war in Ukraine. It’s a lot to take in.
About a year ago, as stocks were soaring from their Covid lows, I reminded clients that someday we would once again meet up with those two old companions that always accompany investors on their long-term journey: Uncertainty and Volatility. And now they’re back.
But there is one enduring principle that will help investors navigate these rough times: Focus on what you can control.
You have control over your reaction.
While you cannot control the market’s path, you can control how you react. You may be disappointed, but you shouldn’t be surprised that markets go down.
Going back to 1926, stocks have gone down about 1 out of every 4 years. It wasn’t all that long ago, during the Great Financial Crisis of 2008-2009, that stocks dropped about 45%. So, it’s happened before, and it will happen again. But over the long-term, stocks have generated strong returns. During the last 15 years global stocks have annualized at about 7.5%.1
Remember, you get paid for taking on risk. Stocks offer higher expected returns than cash or bonds precisely because they have higher risk. Those extra returns are called a “risk premium” and represent the added amount investors get paid for inevitable downturns and uncertainty. If stocks did not go down, there would be no risk premium and no added returns.
You have control over your plan.
An investment plan means having a mix of cash, stocks, and bonds that allows you to sleep at night, even during a downturn. It also means having enough in cash or bonds so you don’t have to sell stocks at fire-sale prices because you need the money for ordinary expenses.
You don’t have to know what’s going to happen next in the market. The good news? Nobody else knows, either. Markets aren’t always perfect but you’re much better off assuming the market is getting it right than trying to outguess it. Stick to your plan and think long-term. If your goals haven’t changed, your investment approach should not either.
Our investment approach focuses on broadly diversified, low-cost funds that track the markets. While we obviously have not been immune to the downturn, we have stuck to our plan and avoided the game changing losses that more speculative areas of the market have suffered.
You have control over your target mix.
With the market’s downturn, you may find yourself underweighted in stocks relative to your long-term stock target. Rebalancing means buying stocks at lower prices to bring your stock percentage back in line with that target.
We consistently review client portfolios for opportunities to rebalance. That allows us to remain in control of the mix, rather than the market dictating how much risk is in a portfolio.
You have control over lowering taxes.
Tax-loss trading means selling stock or bond funds that are down significantly and realizing the losses for tax purposes. Then you reinvest the proceeds from the sales in similar (but not identical) funds—ensuring that you are still in the market and able to take advantage of a rebound.
We are using the recent downturn in bond prices to tax trade on behalf of our clients. Those losses are valuable, as they can be carried forward to offset future capital gains.
Right now, we’re in the midst of volatility and uncertainty. By focusing on what we can control, we’ll ensure that we are around for the upturns, which fortunately last quite a bit longer. We’re all looking forward to better times ahead.
David Rappaport, CFP®