We recently worked with a couple who married in 2008 and began investing as a couple in 2009. What fortuitous timing—getting in at nearly the very bottom of the market and then riding a bull market for 11 years, with only a one-month bear market in February 2020—a mere blip in their investing history.
They have never seen losses more than roughly 6%. They have never seen inflation more than 3%. Needless to say, as investors, they were spoiled; furthermore, no surprise that they’re panicking today. Interestingly, they are not the only investors that are unsettled by volatility. Humans tend to believe their short-term memories and forget about the bad times. While there are few investors who lived through the Great Depression, there are plenty who invested through Black Monday, the Dot Com Bubble, and the Great Recession, but still think the sky is falling today.
To weather our current market volatility, most investors are desperately seeking guidance on what to do. The first is simply don’t time the market. Yes, the market is down 20%. Better to sell now before it loses another 10%, right? However, we don’t truly know what direction it will move. Even if you were able to miss an additional 10% drop, by the time you see that it has reversed direction, you may have missed the re-entry point and could be 10% behind in the recovery.
We recommend following a Ten Year Rule, keeping money you know you will need to access within the next 10 years in fixed-income investments held to maturity. Money that is invested for the long term should be in growth investments. This does not mean the performance of the investments; it means the type of investment—stocks, mutual funds, and exchange-traded funds—that intend to grow the principal investment.
Creating a plan, following the Ten Year Rule, and making only tactical allocation decisions throughout the years can help you remove the emotion from buy and sell decisions. Tactical decisions can allow you to favor sectors depending on the economic cycle, control capital gains taxes by tax-loss selling, and rebalancing to avoid unnecessary risk of being overweight in a particular sector. These are not emotional decisions. These moves have a purpose that isn’t necessarily influenced by the direction of the market.
In this inflationary market, we recommend investors look at their debt, especially any adjustable-rate debt. With interest rates increasing, it is going to become more expensive to service that debt; therefore, a smart move is to minimize your debt if you have extra cash on the sidelines. There are still some investors that should look to refinance their mortgages. Don’t have the attitude that if you cannot get the lowest rate, refinancing is not worth it. Maybe you were unable to refinance when rates were near 3%, but if current rates are lower than what you’re paying, refinancing will save you money.
Finally, don’t stop investing. If you are investing for the long term, continue to dollar cost average into the market. By buying high quality stocks now, you are getting them at a discount from where they were selling six months ago. If you are investing in a 401(k), consider increasing your contributions. While it can be scary to invest as the market continues to drop, you want to continue to invest in a diversified portfolio across multiple sectors. Diversification can lessen the downturns, while continuing to buy when the market is low can result in buying more shares that will benefit you when the market is high again.
Finally, if you need to fill liquidity buckets, you can likely wait out the downturn if you are following the Ten Year Rule. Locking in a 3% return with a 10-year Treasury might be better than we’ve seen in a long time; however, it is not worth selling an investment that is down 20% today. Over the long term, markets tend to go higher; therefore, this downturn will likely recover.
Understanding your behavioral reaction, taking the emotion out of the decisions, and focusing on the fundamentals of the investments should help keep you focused on the long-term results and help you weather the volatility that is inherent in the market.
If you have questions on how to take the emotions out of your investment decisions, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the June 18, 2022 “Henssler Money Talks” episode.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
