By Ryan Martin & Lauren Hunt, Senior Advisors
The stock market is off to a rocky start in 2022. After rewarding investors with strong growth during the past several years, the Standard & Poor’s 500 Index has lost approximately 13% percent of its value through the first four months of this year. The combination of rising interest rates, inflation’s impact on prices and the continuing war in Ukraine is dragging down the prices of just about every publicly-traded company.
But instead of selling stocks or letting idle cash sit, now is an opportunity to consider investing. We can appreciate that buying into equities now sounds a bit puzzling – pretty much like placing your hand on a hot stove. But here’s where the old axiom “buy low, sell high” comes into play. Think about it like this:
When any of us makes a large purchase, such as airline tickets or a new car, we scour the internet for the best price. At times, we wait days or weeks for a sale. Why not consider the same strategy when buying stocks and purchase after they’ve gone down in price?
History bears out this argument. A good example is the recovery that occurred following The Great Recession of 2008-2009. After the Dow Jones Industrial Average hit a low of 6,400 on March 9, 2009 – nearly a 50% decline from its previous high – it quadrupled in value over the next 10 years.
We know that a plunging market can make investors feel skittish. For example, when the onset of COVID-19 shut down the country in the spring of 2020, one person directed us to liquidate millions of dollars in their stock holdings. As we know, the market recovered swiftly and this investor missed out on the spectacular gains of that recovery.
So, how should someone take advantage of this situation? Here are a few potential paths to consider.
Younger Investors – Keep Doing What You Are Doing
For someone in their 30s or 40s who is diligently putting 10-15 percent of their paycheck into their 401k retirement plan every payday, the plan is the same: keep making your periodic investments and over time, it will add up. In addition, if you get a pay raise and can comfortably meet your expenses, consider adding another 1-2 percent of your pay to the 401(k) plan. You are investing for a retirement that is 20-30 years away, so forget about today and focus on the long-term big picture.
For Those Nearing Retirement – Don’t Panic
Investors planning to retire in the next few years may look at the falling value of their portfolio and consider reducing their equity investments. However, while trimming stocks will make a portfolio less volatile, it could also lock in recent losses and make it more difficult to recover in the future. And, if inflation remains high, you will need more growth from a portfolio to maintain a desired standard of living in retirement.
We help these and other clients weather this storm by rebalancing their portfolios to fit their long-term objectives. This means realigning the weighting of stocks, bonds and other assets in a person’s portfolio. In today’s market, we not only make adjustments to maintain the proper balance between stocks and bonds, but also within an individual’s stock portfolio. Given the performance of different market sectors in recent months, growth-oriented stocks have taken a back seat to value style holdings, and we may rebalance their equity holdings to achieve a better balance between the two categories.
Have a Strategy for Your Cash
Many investors seek a safety net during tough times — and that often means holding onto their cash. While this strategy may seem logical, there is a downside. With the consumer-price index rising by more than 8% recently and most banks paying less than 1% a year in annual interest, people lose considerable spending power by holding a lot of cash.
Instead, we often help clients develop a plan that puts their money to work gradually. Called dollar-cost averaging, this strategy enables an investor to divide the total amount to be invested over a specific period. For example, if someone has $500,000 to invest, we may ask them to take 25 percent — $125,000 – and put it work now. Then, we work with them to develop a schedule to invest the remaining amount.
While we can’t time the market’s performance, nor predict what will happen next, recent history shows that it doesn’t necessarily pay to try and time the markets. The Standard & Poor’s 500 Index returned an average of 8.3% annually from 2002 through 2021 if a person was invested every single day. For those who missed the market’s best 10 days during this stretch – just 10 days – the S&P returned just 4.2% annually. Even more dramatic, for a person who missed the best 40 days, the S&P index actually fell by an average annual rate of 2.7%.
Even though it could be a difficult environment for stocks for the next few months, keep the long-term performance of the stock market in mind. And, remember that each investor’s portfolio is built to withstand the stress of a difficult period.
If you have questions or need to discuss your investment strategy, feel free to contact us at rmartin@monetagroup.com or lhunt@monetagroup.com. We offer a free consultation to discuss how a comprehensive financial plan can enable your business and personal wealth to grow.
These materials were prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Index and/or Style returns reflect total return, assuming reinvestment of dividends and interest. The returns do not reflect the effect of taxes and/or fees that an investor would incur. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. You cannot invest directly in an index. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.
