When the economy is in a slow-growth or no-growth mode and the stock market shifts dramatically up or down with little warning, what’s the best plan of action? The answer, in most cases, is “It depends…”
A key factor in considering a plan of action is your investment timeline—whether you are accumulating for the distant future, are nearing retirement, or are already relying on your portfolio for a portion of your income.
Regardless of your stage in life, a key to successful investing is having a plan and staying with it. Ideally, your investment plan will be customized to your needs and goals—and will be structured as one component of a comprehensive, integrated financial strategy that encompasses retirement savings, education savings (if appropriate), tax planning, risk management, strategic use of credit, and estate planning.
Once you have your investment strategy in place, how does a lingering economic downturn, or a highly volatile market, affect you?
- First and foremost, talk with your financial planner or investment advisor and ask for his or her recommendations. Typically, you will be advised to stay with your plan and avoid panic selling. If you are in the asset accumulation stage of life, a down market can provide good purchase opportunities. Again, talk with your advisor and—above all—make decisions for the overall good of your plan.
- A periodic review of your investment portfolio is wise in any economic environment. Pay special attention to asset allocation and the need for portfolio rebalancing. Asset allocation is the percentage of your total portfolio you have devoted to different asset class—stocks, bonds, cash, real estate, commodities, etc. Ideally, you have established an asset allocation strategy in conjunction with your financial planner to achieve a balance between risk and return that is comfortable for you. Depending on the markets and interest rates, the dollar value of your investments in any given asset class might change significantly and undo the balance you have set as your goal. Your advisor can help you determine when and if to consider portfolio rebalancing.
- With more volatile markets, proper portfolio diversification may call for more than a combination of asset classes; ask your advisor about also incorporating investment strategies that are not highly correlated to each other—strategies that rely on manager skill more than on movements in the overall stock and bond markets. These alternative strategies may include:
- – Long/Short Equity
- – Market Neutral
- – Global Macro
- – Fixed Income Arbitrage
- – Managed Futures
- – Hedge Funds
- In an economic downturn, it’s helpful to review contributions to savings vehicles such as IRAs to take advantage of dollar-cost averaging. Also consider the opportunity for tax savings. This might be a good time to convert a traditional IRA to a Roth, or undo one you did when the market was higher. Or you may determine that it’s a good time to fund a Roth IRA to boost your retirement savings. You won’t receive any tax deduction now, but you also won’t have to pay taxes on the earnings when you withdraw them after retirement, and you can withdraw your contributions at any time without penalty. Be sure to check eligibility restrictions; these are subject to regulatory changes.
- Review your 401(k) contributions and consider increasing them during a lingering market downturn, even if your employer has discontinued the company match. Check the maximum annual contribution allowed by law and note the opportunity for larger contributions if you are 50 or older. Ask your financial advisor to review your company’s investment options to be sure you have made the best selections within the context of your overall investment strategy and personal financial plan.
In general, while lingering economic downturns can generate investor concern, they can also generate investment opportunities. Decisions are best made within the context of your comprehensive financial plan, looking at ways to optimize your total resources to achieve both immediate and long-range goals.
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The most effective approach to financial planning is one that integrates all components—investments, insurance, savings for education, savings for retirement, credit needs, charitable giving, tax planning and estate planning—into a unified, coordinated strategy customized to your needs, priorities and preferences.
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