Stay the course

by Robert Spears ([email protected]) 342 views 

It’s been a turbulent year for many Americans, and the current market volatility probably isn’t giving many of us sweet dreams. Still, it will be vital that we stay the course regarding our financial planning. Emotional decision-making during such periods can lead to less-than-optimal outcomes.

When the market is doing well, euphoric enthusiasm may tempt you to put some money to work in the stock market. But when the market sours, you may be tempted to abandon investments when you should hold.

As the market moves in an unfavorable direction, there is no better time to reevaluate your overall financial plan, especially if one of your largest goals is funding your retirement soon. Issues to consider during a period of volatility include current investment allocation, diversification, savings contributions, risk tolerance, time horizon, withdrawals, and potential rebalancing within defined asset classes.

When establishing your primary retirement goals, ensuring you have your immediate needs taken care of is essential. Think through what it might take to run your household and cover your expenses at retirement. Many experts say you will need between 70% and 80% of your current income to have a successful financial experience while in retirement. Your financial adviser can model this as a part of your overall plan.

There is no question that investing is an essential and impactful part of one’s overall financial plan, but other factors bear similar weight, especially during a volatile market. Beyond investing, you need to make sure there is a focus on emergency savings, risk management, tax planning, retirement savings plan, incapacity planning and estate plan.

As markets move, you may have to reevaluate those goals and objectives. Much of this has to do with your time horizon. Time horizon often works in one’s favor — meaning the sooner you start to save and invest, the better your potential growth will be. That has to do with the power of capital appreciation and compounding of returns.

So, during a down market, one might even need to reconsider their time horizon and try to save more to stay on track toward their goals.

Robert Spears

As for risk, everyone has different comfort levels. A financial adviser can help you balance risk versus reward so you end up with a well-rounded plan that might include something more conservative (lower risk, lower reward) and something a bit more daring (more risk, more reward).

Rebalancing is certainly a key concept when we have periods of up markets. Many investors have a standard asset allocation model that they stick with. Still, during periods of positive quarters or years, they get a chance to take the “cream off the top” and take gains or excess return in their portfolios and rebalance in more conservative investments to protect those gains. That is an easy exercise in retirement accounts, given that the account is usually in a tax-deferred status. Still, more of an issue in taxable accounts and one should discuss this strategy with their tax adviser.

However, one might need to consider the opposite in a period of declining markets. Look at it this way; if your traditional position in the stock market is now off by 10%-15%, you may need to rebalance some of your conservative assets into growth assets to maintain your exposure and proper asset allocation. Once again, a professional can evaluate your current situation and help you determine if this strategy is worth considering.

While a volatile market may not be the most favorable time to be making sure your financial house is in order, just like with your home, you cannot and should not ignore your housework while waiting for the market to swing back. If you plan and pivot during a down period, you’ll be ready to pounce on opportunities and reap the rewards during an upswing.

Robert Spears is the director of advanced planning and wealth advisor manager for Arvest Wealth Management. The opinions expressed are those of the author.