A popular analogy for the rising and falling of financial markets is that markets tend to “take the stairs” on the way up and “take the elevator” on the way down. It’s an easy way to say that markets seem to fall a good bit faster than they rise and it’s something we’ve certainly experienced this October.
The S&P 500 shed 6.9% in October, and that’s after a 2.7% rally over the last two days of the month. A plethora of reasons are given for the decline including everything from Federal Reserve interest rate guidance, the possibility of additional Chinese tariffs, & actual Amazon earnings versus analyst expectations. Regardless of the reasons for the decline, a month like October never feels good to walk through or see on November investment statements.
“So, should we be doing anything different?”
That’s the question I constantly ask myself and hear most often from clients during declines in the market. The natural reaction is to want to move every investment owned to cash and avoid any more loss or any more pain. However, for the long-term investor with a plan in place, it may not be the best move.
A long-term financial plan requires long-term investment results to fight inflation over time and produce the income needed to fund retirement. If we were to implement a market timing approach into our investment management, it would require us to be right twice each time the market fell. We’d need to be right that the market had reached its peak and sell, and then we’d need to be right again as to the bottom of the market’s fall in order to buy back in at the right time.
Because the market historically has one or two -5.00% (or more) corrections per year, we’d need to be right four times per year, every year, for this strategy to work. In addition, each time the market falls, it becomes very difficult to want to put cash to work because of the possibility of it falling further. Ben Carlson made an analogy last week that cash is like a warm blanket on a cold & dreary day. It’s especially hard to leave the bed in weather like this because it’s so comfortable to stay where you are.
“So, should we be doing anything different?”
“Maybe.”
Instead of moving to cash and buying back in, a strategy that would prove to be inconsistent at best, we seek to take a different approach.
First, we work with each client from the start to objectively determine their risk tolerance using the purely quantitative risk measurement tool from Riskalyze. In reviewing numerous portfolios for clients and their friends and family over the years, we’ve often seen investors taking on more risk than they’re comfortable with when their risk tolerance is objectively measured. By measuring and regularly updating risk profiles, we’re able to work towards client portfolios that are a good fit for each client on a consistent basis. This by no means ensures that a portfolio won’t fall in value, but it does allow us to communicate the risks associated with each portfolio we build and work to tailor a portfolio to each individual client. Feel free to click the link below to establish your risk number or update yours now if it’s been a while.
Does My Portfolio (Still) Fit Me?
Second, we work to take advantage of market declines of 10% or more by re-balancing client portfolios during market corrections. Re-balancing a portfolio can help a portfolio stay in line with its owner’s risk tolerance and can also help clients be opportunistic in times of market volatility.
If a portfolio holds 60% stocks and 40% bonds and we have a month like this past October, the allocation of a portfolio can change to 55% stocks and 45% bonds or even 50/50. Re-balancing during a downturn would sell a portion of a portfolio’s bonds or fixed income and use the proceeds to buy stocks that have decreased in value during the market’s fall. By re-balancing, you’re working to sell portions of the portfolio that have become too large (according to risk tolerance) and buy other portions that have become too small. This is a tangible way for us to work towards “selling high” and “buying low” strategically.
For those of our clients that have discretionary advisory accounts, we’re working to re-balance their accounts now where appropriate and no action is required on their part. For those that have brokerage or mutual fund accounts, we need to visit by phone or in person before we’re able to re-balance accounts. In either case, feel free to call the office with any questions regarding re-balancing, portfolio management, or financial planning in general.
The answer to the question we’re all asking is “maybe” or “consider doing nothing.” If the action you’re thinking of taking is to update your risk profile and possibly re-balance your portfolio, then “maybe” is your answer. If you’re thinking of selling assets you own to stop them from fluctuating, then considering doing nothing at all may be the best action you could take. Instead, take some time to read Look Where You Want To Go and get busy thinking through what’s most important to you.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
Re-balancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.