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Wealth managers caution against ‘emotional’ decisions
Those who are looking for long-term investment returns should ‘stay the course,’ advisers say.
A pair of local financial planners say investors should resist the temptation to make rash decisions during the current stretch of stock market volatility related to the spread of COVID-19.
Ryan Diepstra, senior vice president at Centennial Securities, and Steve Starnes, senior financial adviser and principal at Grand Wealth Management, recently spoke to the Business Journal about the impact of the coronavirus outbreak on financial planning.
The advisers agreed that the current crisis — which has many people working from home “a little closer to (their) computers and watching what’s going on in (their) accounts,” Starnes said — could lead people to panic and convert their assets to cash on impulse as headlines multiple times per day highlight the market’s rapid swings.
Diepstra said it’s important to remember that bull markets — those that are on the rise — historically last longer than bear markets — those that are receding — and investors who sell their stocks in a panic should keep in mind that they have no crystal ball to tell them when to re-invest. Therefore, folks who are investing with retirement in mind should stay invested in order to receive the best returns.
“The average bear market selloff is -42% and with an average of 22 months. Conversely, the average bull market is 155% with an average of 54 months,” Diepstra said. “As clients check their 401(k) accounts online and get their statements in the mail, they need to ask themselves what the purpose and time horizon of their investments are. If both their purpose and time horizon correlate for the long-term, they should understand that bull markets have always beaten bear markets. Investors with this temperament will reap the rewards.”
Diepstra noted there have been 12 bear markets since 1929 and we are now in the 13th bear market, with the S&P 500 down 30% on Monday, March 16, with continuing volatility after that.
“The most recent bear market, in 2008-09, resulted in a 57% drop,” he said, noting that if clients were to panic during that time period and sell off, they would have missed out on significant returns as the market climbed back into bull territory.
“During times like these, it’s important to focus on the data and facts as opposed to making irrational and emotional decisions because of an article that you read on social media or because you saw people lined up at Costco for toilet paper,” Diepstra said.
“The economy will always have four distinct stages: expansion, peak, contraction and trough, and it’s impossible to time when each of these stages will occur.”
Diepstra added the average return of stocks that make up the S&P 500 from 1950-2019 has been 11.3%, according to data compiled by JP Morgan Asset Management. In dollar figures, this translates to a $100,000 investment growing to over $844,684 during a 20-year period, according to the JP Morgan data.
During a bear market such as this one, Diepstra said investors really have three options: panic and put their assets into cash, hold or reallocate their assets based on their risk tolerance, or buy. The latter two are the best moves, he said, but which route a client takes will depend on factors such as age, risk tolerance, liquidity and overall investment objectives.
“Historically, our smarter and more successful clients are in that last category, which is, ‘Everything’s on sale. This is good!’” he said.
Starnes said it’s important to remember this volatility will pass, and it would be wise for investors to resist the urge to constantly check their portfolios while they’re cooped up at home right now.
He added before this crisis hit, stocks were “somewhat expensive” and now the prices have fallen, and bonds have gone up, which makes this a good time to buy stocks and sell bonds.
“In other words, we’re rebalancing to pick up more shares at lower prices as that is a great way to manage risk in a portfolio and improve returns a little bit,” he said.
A second strategy he recommends is tax loss harvesting, which is “selling one security at a loss and immediately same-day buying a different security, so when the markets go back up, you can go back up with it.”
“By selling a security at a loss, you can report that on your tax return and probably save a whole lot in taxes over time because of that,” he said.
More information on the advantages and guidelines for this technique is available at Investopedia at bit.ly/taxlossharvesting.
Starnes said this is a great time for clients to reevaluate the level of risk in their portfolio. Some people may have invested all their assets in company stock, which has fallen, which makes this a good time to reinvest in other areas.
For younger people who are just starting to invest, he said this is a good time to “turn on” automated investing in a 401(k), or, if that’s already been done, to increase contributions by a percentage point or two to compensate for the smaller returns happening in this bear market.
Starnes said whether you’re 35 or 65, it’s “not helpful to listen to the noise every day,” and if long-term results are the goal, the wisest thing to do right now is to “stay the course” and keep one’s assets invested.
Both Diepstra and Starnes recommend that investors should talk to their financial adviser to obtain tailored advice about investment strategies during this time.