The Dos and Don’ts in Volatile Markets
By Katie Bruno, MIMFA
CERTIFIED FINANCIAL PLANNER™ Professional
It’s natural for times of market volatility to bring up feelings of apprehension and uncertainty for investors.
With the recent outbreak of the coronavirus (COVID-19), the volatility of the financial markets has spiked. On Monday, March 16, 2020, the Dow Jones Industrial Average recorded its worst one-day drop in history. Selling was so extreme that trading was halted for 15 minutes, the fourth time that a “circuit breaker” has been triggered in the last three weeks. These are certainly unprecedented times, and the emotions investors are experiencing are very real.
While we understand the concerns and fear derived from the uncertainty of COVID-19, it is also important to look to facts, and to draw on experience learned from past market volatility.
At Morey & Quinn Wealth Partners, we have been reaching out to our financial planning clients to share our perspective and thoughts, not only around the turbulence, but also where we think there could be opportunity for you as investors. In times of uncertainty, our goal is to help you continue living your Well Planned Life, and adjust for the bumps in the road.
This week’s blog will address some of the “Dos and Don’ts” in Volatile Markets.
- Do fight fear with facts. Emotions can lead to making irrational decisions. When you become fearful or read of scary news, you naturally begin to question what you should do. Lean on your financial advisor at Morey & Quinn for the facts. They can help you apply reasonable actions to help adjust or stick to your goals and financial strategy. It’s important not to compromise your goals by reacting impulsively.
- Do use a financial advisor to discuss your plan and options. A professional financial advisor can help you identify your goals and align them with resources available to you. In many cases, they can also access additional resources from their firms to help provide deeper insights, research and guidance on the markets, economic and monetary policy, and specific investments.
- Do consider harvesting tax-losses if appropriate. In certain situations, a practice called tax-loss harvesting may be beneficial. This strategy involves selling an investment at a loss in order to reduce money you may owe for taxes on investment gains. At the same time, you free up cash to reinvest at lower prices. If you’ve ever heard the old saying “Don’t marry your stocks,” this is where it applies. The strategy only involves taxable accounts.
- Do fast-track or prepay annual contributions. Another way to look at pullbacks is that stocks are selling at a discount. If you are sitting on cash and were planning to make contributions throughout the year, there may be benefits to investing a lump-sum into the market today while stocks are depressed. This could apply to retirement contributions, 529 plans, and others.
- Do look for an opportunity to refinance with low interest rates. Federal Reserve Chairman Jerome Powell, the nation’s top financial policy maker, and the Federal Open Market Committee (FOMC) have cut interest rates twice in March as a response to the growing threat the coronavirus poses to the U.S. and global economies. Lower rates could provide an opportunity to refinance high interest rate debt. One thing worth noting is that even though the Fed reduces rates, the impact to mortgage rates could be minimal or take longer. Mortgage rates don’t fall as fast as Treasury yields and the dynamic between the two is more complex, especially during times of volatility. Your bank will be the best resource for you regarding refinancing rates.
- Don’t panic and sell. This chart illustrates how letting emotions dictate your investing strategy can be risky, showing three potential paths. The fearful investor who exited the market and invested in cash ends up with $55,125. If that investor had reinvested in the market after one year of withdrawing, he would have nearly three times the amount a decade later. And if that investor had stayed the course without exiting the market, he would have more than four times the amount of the cash investor, with a balance of $238,447. This is a reminder that short-term decisions based on fear can have significant long-term consequences. The investor who exited essentially locked in losses and missed out on the gains.
|Source: Morningstar. Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. This analysis does not include transaction costs which would reduce an investor's return. Recession data is from the National Bureau of Economic Research. The market is represented by the Ibbotson® Large Company Stock Index. Cash is represented by the 30-day U.S. Treasury bill. An investment cannot be made directly in an index. The data assumes reinvestment of income and does not account for taxes or transaction costs.|
- Don’t make impulsive knee-jerk changes. Review your long-term plan and make sure your selected strategy is still appropriate. Remember why you created a plan in the first place. A customized financial plan should account for the occasional bumps in the road while making progress toward your long-term financial goals. There may be situations where your goals have changed and therefore require a change in strategy. The financial advisors at Morey & Quinn Wealth Partners can help you determine what changes may be necessary.
- Don’t try to time the market. We do not know when the market is going to bottom out and neither do you. Just because something has dropped significantly does not mean that it cannot drop more or that it's going to quickly recover. It’s really important to lean on your long-term financial plan and strategy.
Morey & Quinn Wealth Partners
Raymond James® LIFE WELL PLANNED.
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Any opinions are those of Katie Bruno, MIMFA, and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.
Raymond James Financial Services and your Raymond James Financial Advisors do not solicit or offer residential mortgage products and are unable to accept any residential mortgage loan applications or to offer or negotiate terms of any such loan. You will be referred to a qualified Raymond James Bank employee for your residential mortgage lending needs.
The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. 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.