For many, it was an easy decision to get out of the market and into cash when recent news of the global pandemic rocked the world economy. Once you sold, your sleep improved, your blood pressure dropped, and you quit compulsively checking your investment account balances.
But now it’s the large amount of cash you are sitting on that is keeping you up at night. The easy decision to go to cash seems like a distant memory. Now you face the hard decision of when and how to get back in the market.
While most financial advisors recommended staying the course when the news of the COVID-19 pandemic hit in March, many investors opted to go to the safety of cash. The equity markets in particular saw a flight into cash. Consider the Dow Jones Industrial Average plummeted a whopping 31% over the course of thirteen trading days from March 4th to March 23rd. That’s a lot of stock-selling.
If you are one of the people who opted for the safety of a cash position, do not feel guilty that you may have missed out on some investment gains due to the timing of your decision. So much of investment theory is based on historical events, but there is no recent event like what we are experiencing today. The level of uncertainty is high and that, understandably leads to the need for safety.
While the markets continue to be volatile, we are enough days into this that we can calm down and start thinking of a plan to get invested again. But if you are challenged by the prospect of deciding when the best time to get back in is, and how to do it the right way, here are some guidelines to use in making this decision:
- Don’t try to time the market. Get back in when you feel comfortable, but realize that it may not be the very best time. There is no magic horn that sounds when the markets are ripe for getting back in. They may never get back to mid-March levels, so don’t look for that to happen. Just wait until you feel comfortable with where things are going, then get back in.
- Diversify, diversify, diversify! Yes, it is true that you can diversify some extent of the risk out of your portfolio, but this takes some work. There are two levels of diversification you should pursue, which are at the portfolio level and the asset level. A smart mixture of large-cap, mid-cap, small-cap and international stocks, fixed income securities, alternative investments, and cash will help lessen the risk in your investment portfolio. This is because economic events do not affect all types of companies and securities the same way. You can further diversify by investing in mutual funds that own a large basket of companies or securities across many different sectors, or a large portfolio of individual stocks and bonds.
- Don’t be afraid to be extra conservative. If you don’t feel comfortable with getting back in the stock market, consider fixed income investments such as bond mutual funds. These offer a diversified mix of bonds that typically have much less downside than stocks. Just know there is less upside as well.
- Invest in companies or sectors that make you feel comfortable. Not all companies and sectors have experienced as much volatility as others during the recent market turbulence. Do some research and figure out what sectors seem to be less affected by what’s going on. You may feel safer this way.
- Invest over a period of time. This is called dollar-cost averaging and it refers to the practice of investing a consistent dollar amount in the same investments over a period of time. It is another way to manage your investment risk. It also eliminates the emotional component over the decision-making of when to get back in the market. However, you will still need to do your research on picking the right investments to make this work.
- Commit to a long-term strategy. This is about picking a strategy and sticking with it. First, look at your risk tolerance and your time horizon, then determine the level of risk you want to take. Let’s say you’ve determined you feel most comfortable with a balanced objective (50-50 stocks-bonds) based on your risk tolerance and time horizon. Invest using that strategy and commit to staying the course, no matter what is happening.
- Work with a professional. While this is the last thing on the list, it is probably the most important. Managing an investment portfolio is like overseeing a construction project or planning a large event – to do it best, you need to hire someone who does it for a living. There are many different factors you should consider when choosing a financial and investment advisor. Perhaps the most important is whether or not your advisor is legally obligated to make investment decisions that are in your best interest. This legal obligation is referred to as a fiduciary duty. Fiduciary is a word that simply means an advisor is required by law to offer financial and investing advice that’s best for the client, not for the firm. All financial advisors generally fall into one of two broad categories: Registered Investment Advisors (RIAs) and broker-dealers. RIAs are fiduciaries, while broker-dealers are not.
SVA Financial Group is a Registered Investment Advisor (RIA) and as a fee-only firm, our financial consultants are responsible fiduciaries who work in the best interest of each client. During the recent market volatility and the impact that COVID-19 has had on everyone’s lives, it is even more important to have a financial advisor who understands your needs. SVA Financial Group’s investment strategy is carefully designed, looking at both risk and return when determining the right fit for our clients’ overall financial and investment goals.
©SVA Financial Group
All information herein has been prepared solely for informational purposes only and opinions are subject to change. Past performance is not indicative of future results and all investments involve the risk of loss of principal. For information on how these general principles apply to your situation, consult an investment professional.