Navigating Uncertain Financial Markets – BusinessWest

It’s time to stay focused and think strategically

By Barbara Trombley, CPA

If you have a retirement account, like many of us, it’s hard not to follow what’s happening in the financial markets today. We are officially in a bear market, defined by a decline of 20% or more in a broad stock index.

The Dow Jones Industrial Average moved into bearish territory on June 13 of this year. Unfortunately, bear markets can fall even deeper than the 20% threshold and can do so for an extended period. It’s a tough time to be an investor in this scenario but eventually the market bottoms out and investors feel comfortable again to start buying, ending the bear market.

Bear markets are usually the result of a recession or other financial stress. We’re not officially in a recession, but many experts think it’s coming. A recession is defined as a significant drop in economic activity that lasts for months or years. This often means that unemployment rises as businesses fail or shrink to control costs. Corporate profits fall causing stock prices to fall.

Usually, a bear market means tougher economic times ahead. Unfortunately, bear markets are “normal” and occur periodically. We actually had a short bear market at the start of the pandemic. Bear markets tend to be much shorter than bull markets (when stocks rise over a period of time). They also tend to be statistically less severe, with average losses of 33% compared to average bull market gains of 159%, according to data compiled by Invesco.

“It’s a tough time to be an investor in this scenario but eventually the market bottoms out and investors feel comfortable again to start buying, ending the bear market.”

What should an investor do in a bear market? Risk tolerance, asset allocation and your age really come into play right now. The percentage of stocks in your portfolio should match your risk tolerance and age. For example, if you are in your 30s and 40s investing in your 401(k), you might be very aggressive and hold a high percentage of shares.

If so, you should be happy to make your monthly deposit into your account. You buy shares “for sale” and you have several years to compensate for temporary losses in your account. Even if you’re a few years away from retirement, and depending on your situation, a bear market could be seen as an opportunity to buy stocks at a discount.

A prolonged bear market for someone approaching retirement or a new retiree could mean making changes to your lifestyle. For example, you could limit withdrawals from your investment account and/or eliminate panic selling. When you withdraw money or sell in a bear market, this is considered “blocking losses”. You may be able to reduce your expenses or find additional short-term employment until the economy is more stable.

There are financial products available that could potentially fit many portfolios. In some cases, when deemed appropriate, an annuity could be used to create a more stable income, a REIT (Real Estate Investment Trust) could be used to help diversify a portfolio and many insurance companies offer products with downside protection. Consult your financial advisor for different ideas to help you deal with volatility in your portfolio.

Perspective is the key to a good night’s sleep in the face of market volatility. Dips are a normal phenomenon in the stock market. Since 1932, bear markets have occurred, on average, every 56 months (about four years and eight months), according to the S&P Dow Jones indices. Be sure to keep emergency funds in the bank to minimize market withdrawals. Don’t make rash changes to your portfolio. There is a saying that “time in market beats market timing”. It is very difficult to predict the exact best day to sell or buy a stock. Missing the best trading days, over time, can seriously hurt your performance. Having a plan and sticking to it might yield the best long-term results.

If you are a new investor, you may want to proceed with caution. One potential strategy is to average the dollar cost of all the funds you have in the market (spread the investment over a period of time). This way you are buying at different price levels in the market. Averaging involves continuous investment in securities regardless of the fluctuation in the price levels of those securities. An investor should consider their ability to continue buying despite fluctuating price levels. Such a plan does not guarantee a profit or protect against losses in declining markets.

No one predicts when the market bottom will occur, and timing it is nearly impossible. I think you should make sure you have a well-diversified portfolio with a mix of asset classes, although there’s no guarantee that a diversified portfolio will improve overall returns or outperform an undiversified portfolio. Diversification does not protect against market risk.

Always remember the sayings “This too shall pass” and “Time is on your side”. People who have been investing for a while have been through many economic downturns and have survived and, most likely, thrived if they stayed the course and stuck to their plan!

Barbara Tromblay is a Financial Advisor and CPA at Tromblay in Wilbraham, CPA: (413) 596-6992. Securities offered by LPL Financial. FINRA/SIPC member. Advisory services offered by Trombley Associates, a registered investment adviser and separate entity from LPL Financial. The opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations to any individual. All performance referenced is historical and does not guarantee future results. All indices are unmanaged and cannot be invested directly.

Similar Items

Aaron Vega