Recently I read a beautifully written article by WSJ’s Jason Zweig entitled 5 Things Investors Shouldn’t Do Now. So, I thought I’d piggy back on that idea and express what I feel investors should do now. These are steps that can be taken by any investors at any level. So here goes…
1) Deploy additional capital. As an advisor, this may seem a little self-serving but hear me out. In nearly all my client interactions the less intuitive reaction is to write contribution checks, rather than to sell current holdings. Cashing out in market slides is one of the major reasons for under performing the market over the long term. Most investors would agree they are in it for the long haul, but frequently exhibit “short-term” investing habits. The smart thing to do is to find capital to contribute to your investment accounts. Where to find this extra capital? I made reference to a possible source inside your current portfolio in my last posting.
2) Buy on the down days. This is a saying I first heard coined at my firm, but essentially has the same effect of systematic purchasing. This is probably better known as dollar cost averaging. Putting your capital to work in existing positions (or new ones) while the market is falling can be a great way to outperform over the long term. Needless to say, the purchases need to be part of a complete investment plan which takes into consideration your risk and return objectives.
3) Set an appointment with your advisor to stress test your portfolio. Most experienced advisors can conduct this exercise for you that will give you a “worst case scenario” that may go a long way to alleviate any anxiety you’re feeling about market volatility. This is an exercise that I has proved very helpful for our clients. Some advisors may be even inclined to backtest your current investment strategy to see how well it has held up in the worst markets and provide advice on adjustments.
4) Build a rainy day fund. Possibly one of the most comforting things in volatile markets is knowing that everything isn’t invested. Having a “safety” bucket of assets that are in cash or cash equivalents (12 months is typically fine) goes a long way to help ease the mind. Consider that this bucket is designed for risk management and insurance, so it won’t pay huge cash dividends, but will make up for it with the peace of mind it provides.
5) Plan a trip. Take your mind off your investments and plan some time to enjoy the fruit of your labor. Often market corrections don’t continue on for weeks save a few exceptions. It is reasonable to assume that before you realize, your accounts will be back in the green territory. If you’ve hired a team to manage your investments let them do their job and go take a well deserved vacation (or staycation!)
If you’ve worked hard and stuck to a good investment plan for most of your life, chances are you will be just fine. More often than not, investors that make habit of tried and true principles end up being successful. Fully acknowledged, no one likes down markets or extreme volatility (especially us advisors!), but we understand this is part of market cyclicality.
Remember that one of the best trades of Sir John Templeton’s investing career was made by investing during the Great Depression and exploiting market pessimism only to see those investments soar by the start of World War II. I think an appropriate axiom of his to embrace during market volatility is:
“If you want to have a better performance than the crowd, you must do things differently from the crowd.”