In March 2020, the U.S. stock market entered a bear market for the first time since the Great Recession. For many investors, a drop of 26% (as of today’s writing) is the largest decline they’ve ever witnessed. For others, the timing couldn’t possibly be worse, particularly in retirement years, where that nest egg is expected to generate income to last a lifetime. Still, for others, with cash sitting on the sideline and long investment horizons, this represents a great buying opportunity for stocks that are ‘on sale.’
When stocks started tumbling because of unprecedented, worldwide concerns over COVID-19, also known as the coronavirus, our firm started reaching out to our clients for two reasons. First, many of our clients had never been with us during a market downturn, and we wanted to give them assurance. Second, we wanted to see what questions people have about their portfolios.
While each client conversation was unique, we’ve compiled a list of 5 questions below. Some are questions that clients have actually asked, while others are questions that we’ve tried to anticipate and answer in a proactive manner.
Bear Market Question #1: Will my portfolio be okay?
This is probably the most common (and most normal) question that is on our clients’ minds, even if they don’t ask it. If this is a question you have, you have every right to expect your financial advisor to take some time to walk you through the particulars of your portfolio. While a low-fee, properly diversified portfolio is no guarantee against stock market downturns, it most likely will rebound faster and perform better than a high-risk, high-cost investment that got ‘sold’ to you in a good market.
If you do not have an advisor, you may want to take a look yourself or ask a fee-only advisor for their honest opinion. While specific investment advice is beyond the scope of this column, below are some ways to see how well your portfolio might hold up in a downturn:
Are you paying too much in fees? Are you paying more than 1% on any mutual fund or exchange traded fund (ETF)? If so, can you say with certainty that the holding doing ‘better’ than the others? Probably not. And paying above-market costs when your holdings are down 25%-30% is just adding insult to injury.
Do you understand the purpose of each of your holdings? Each investment should have a specific purpose in your portfolio. If your advisor recommended an investment, they should be able to answer any question you have about why that investment is in your portfolio. And the proper answer is that your advisor believes there is a very clear, specific role for that holding in helping to diversify your portfolio.
Is your portfolio properly diversified? This might be the hardest question for you to independently answer. But if you’re working with an advisor, you should be able to ask this question and have them walk through what they’ve done to diversify your holdings.
Is your portfolio right for your situation? This is another difficult question. The answer depends just as much on your life situation as it does on your actual holdings. Someone who just retired and needs to generate ongoing income is going to expect something different from someone who is in their 30s, expecting to work for another 20-30 years, and is willing to put away huge chunks of money when stocks ‘go on sale.’ But odds are, you probably will have a feeling about whether your portfolio is right. If that feeling is not a good one, trust your gut and start asking your advisor.
Again, the right answer to these four questions is no guarantee. However, the wrong answer (or just a suspicion of a wrong answer) should have you asking deeper questions.
Bear Market Question #2: What if I need money or if I want to have more available cash?
There are two versions of this question. First, you might need money for things that had nothing to do with the stock market. Second, you might feel a little more secure if everything is in cash while the stock market ‘plays itself out.’ Let’s handle each question separately.
1. You need money for already anticipated reasons. While your needs might not have changed, it’s important to realize that a bear market might not be the appropriate time to sell investments just because you need the money. It might be worth looking into a couple of things:
- Can you wait until the market recovers?
- What are the tax implications if you sell?
- Are you able to get the money from elsewhere?
- Would you be able to generate this cash as part of your portfolio rebalancing?
These are all questions you might ask your financial advisor. Yes, even the tax question, which your advisor should be able to help you with.
2. I need more security. This is a pretty common question. But it’s such a vague question, that it’s hard to answer—unless there’s a preconceived answer, such as “I’ll only feel safe when all my investments are in cash.” There are ways to provide security, such as a bond or CD ladder, without having to sell out of investments. Ask your financial advisor on ways they might be able to show you the stability that should be in your portfolio.
Bear Market Question #3: When should I sell?
There are lots of variables that we consider when we recommend selling securities. There are taxes and fees, as previously mentioned. We might recommend selling out of a mutual fund where the leadership has recently changed. We might recommend selling out of an ETF that has recently raised its fees, or into one that has recently lowered its fees yet still does the same job.
We might recommend selling for any (or all) of these reasons as a part of our normal rebalancing process. However, we likely will not recommend selling investments just because the stock market dropped 30%. Would you sell your house when you looked on Zillow and found out that the recommended price is only 70% of its previous value?
In fact, for clients in the right position, we might recommend this as a buying opportunity.
Bear Market Question #4: When should I buy?
Do we buy everything right now? Probably not—we don’t know if the market has another 20% left to go.
But a common approach, and one that has worked often for patient investors, is called dollar-cost averaging. The concept is pretty simple—take the amount of money you have to invest, and spread out your investments over a matter of weeks or months. The reason you would do this is to take advantage of buying more shares of investments when prices are lower (after stocks have dropped), instead of just putting all of your money in at once and hoping that you timed the market right.
A dollar cost averaging scenario might look like this:
Company X is currently selling for $48 per share, down 25% from its high of $64. We have $12,000 to invest. We could buy more now, but we don’t know if it’s going to keep falling before it recovers. In a dollar-cost averaging scenario, we might invest:
$2,000 on the 1st of each month over the next 6 months
$4,000 on the 15th of each month over the next 3 months
$1,000 on the 1st and 15th of each month over the next 6 months
There are literally an infinite number of scenarios. But what’s important is that the dollar cost averaging approach does not depend on the stock price itself, but rather on the same date each month. That way, the money is being invested systematically—we might get lucky and pick up some shares for $45, or we might buy fewer shares at $50. We’re not looking for the best price—we’re spreading out our investment so that we buy more shares when the investment is cheap, and fewer shares when it’s more expensive.
Bear Market Question #5: What if this lasts longer than everyone thought?
This depends on the rest of your financial picture:
If you depend on your portfolio to generate income for you: If you’re retired, you might want to sit down with your advisor to learn how an extended market might impact your near-term picture. The goal we have for retired clients is to have 10 years of living expenses captured in their bond ladder, which is the part of their portfolio that they can draw their living expenses from. Since we hold these bonds and CDs to maturity, we can reasonably predict when that money will be available to them. That way, the rest of their portfolio can weather the storm without a significant impact to their day-to-day. Even if their bond ladder is only 5-6 years, that will likely be enough to get through most down markets.
If you don’t depend on your portfolio to generate income: If you’re in your prime earning years and have the ability to continuously pour money into retirement accounts, particularly if you’re able to contribute to a Roth IRA. You might also consider Roth conversions from your traditional IRA, since you can get more ‘bang for the buck’ in moving investments while they’re low. Of course, you’ll want to still do proper financial planning to ensure you’re well-positioned in the case of:
Layoffs, which are common during a recession
Decline in the real estate market
Sudden impact events, like a hospitalization or other traumatic event
Regardless of where you are in life, you should be able to communicate with your financial advisor to better understand your portfolio. And your advisor should be expecting your calls—if they’re not calling or otherwise reaching out to you. You’re the client, and this is the exact time where financial advisors earn their money—when times are looking tough.
If you don’t have an advisor, or if your advisor hasn’t been giving you the service you think you deserve, please contact us. We’d be more than happy to schedule a complimentary appointment to see how we might be of service to you. And if we aren’t a good fit, we’ll be more than happy to refer you to one of our highly trusted peers.
The foregoing content reflects the opinions of Lawrence Financial Planning, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.
Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will recover or react as they have in the past.