By Amanda Herrick Smith and Cynthia Rivera
The effects of an escalating coronavirus outbreak has sparked universal anxiety in investors as the stock market took a nosedive and posted its biggest loss since the 2008 financial crisis. In light of what looks like another volatile week, many investors wonder whether to sell, do nothing or take this opportunity to add exposure to the stock market. The following are some tips to consider for those who already have a stake in the market. While many expect the downturn to continue in the near future, remember that the market has historically recovered from previous financial dips.
- As long as your immediate cash needs are met, consider keeping your money invested. Unless you have an immediate need for cash, do not sell your assets out of fear. Selling stocks at a loss will definitely lock in losses and you will lose the opportunity to have your cash invested on days when the market goes up. If you want to minimize exposure consider selling your assets in increments of 5% to 10%. That way if the market later goes up or down you are hedging your bets while giving yourself the opportunity to be able to adjust later on. Running to cash out of fear is not necessarily the best strategy. If we look back to the crisis of 2008-09, stocks began to fall in late 2007 and continued to decline until March 2009. Unemployment peaked at about 10% in October 2009. Recovery began in the second half of 2009. Hang in and ride it out. The markets have historically bounced back.
- Compare your risk profile to your portfolio risk allocation. It is important to regularly reexamine your investing strategy to ensure that your asset allocation aligns with your financial goals. As you approach retirement age, you should maintain a larger proportion of your funds in lower-risk investments. When you are younger, you have more investment longevity; therefore, you can take more risk. It is important to analyze your own personal risk tolerance before deciding which positions to keep and which ones to sell. If you have investments that could decrease further in value, it may be worthwhile to sell them during market declines because it limits further loses while reducing risk. Reduce the risk of loss.
- Buy on clearance and sell at a profit. As stock prices go down it provides investors the opportunity to buy more shares. You can be more aggressive if your retirement is decades away. As long as the investment time horizon is long, it may actually make sense to invest at times when the market has significant declines. Buy low, sell high.
- Use a dollar-cost averaging strategy. You may want to consider investing a fixed sum of money at regular intervals over time. For example, if you want to invest $1,200 over the course of a year, instead of making the investment all at once, consider adding $100 to your portfolio every month. A dollar-cost averaging strategy removes emotions from investing because there is no need to time contributions into the market. Don’t time the market.
- Remain disciplined. It is important to remain disciplined during times when the stock market is in full swing. Making rash decisions out of fear most often will not result in the desired outcome. In general, you don’t want to invest more than you can afford. So it is important to identify the right amount of risk you are willing to take to sleep at night, while balancing it with your personal goals and objectives. Stay the course.
If at any time you are concerned about your portfolio or would like a second set of eyes, please consider reaching out to one of the professionals at John G. Ullman & Associates, Inc.