No one could have predicted the immediate devastation wrought by COVID-19. Our world was upended seemingly overnight, and we all are now left scrambling to understand the ever-shifting implications of this novel disease.
Health concerns always remain priority number 1. It’s likely we know someone affected, directly or indirectly, by the pernicious symptoms of the Coronavirus or the worldwide economic shutdown. But with our attention focused on the health and welfare of those around us, it’s easy to forget about our own financial lives. Here are three strategies to ensure your investment portfolio is protected during this era of uncertainty.
1. Stay on Course by Staying the Course
A quote we use often with clients is, “It’s not timing the market, but time in the market, that matters.” Have you fretted about moving your portfolio out of stocks until the dust settles? While this is a natural and understandable emotion, it is quite simply the wrong financial decision. Moving back and forth from cash means you need to be right, twice — something that’s impossible to do.
According to a Dalbar study, average investor returns over a 20-year period were only 2.6 percent, while a standard 60/40 stock/bond portfolio returned 6.4 percent. Why such a large discrepancy? The study attributes this difference in performance to badly timed — and likely emotionally driven — overtrading. Ignore the short-term agita and let the market work for your long-term goals.
2. Acknowledge, and Embrace, Volatility
The 2010s were the first decade in American history without a recession. Outside of a few fits and starts in Europe and Asia, the smooth economic growth was what the market needed after the Great Recession and the lost market decade of the 2000s.
While many investors are worried about the COVID-19 market upheaval, volatility is a normal and necessary part of the market experience. Investors contend with a seemingly endless torrent of new economic, political, and technological change. Periods of large market moves — and market underperformance — will invariably happen. For instance, markets experienced double digit declines in 22 of the last 39 years, but they still managed to end in positive territory 75 percent of the time.
Volatility also offers opportunities to intrepid investors. Two important tactics to employ during periods of heightened market upheaval are tax-loss harvesting and rebalancing. Tax-loss harvesting allows you to take investment losses to either offset other capital gains or reduce your income tax liability (up to $3,000 per year). Rebalancing provides investors with the opportunity to systematically take equity gains or proactively buy into equity weakness.
3. Build a Better Portfolio for You
Constructing the best portfolio for you and your family should be an individualized, and aspirational, endeavor. We advocate a strategy that allocates your funds into specific buckets.
The bucketing approach builds on the idea of safety first for your current and future income needs. We recommend creating an emergency fund with at least six months’ worth of expenses in liquid cash investments.
Depending on your timeline to retirement, we also suggest that you take a portion of your investment portfolio and invest that in safe, short-term, fixed-income investments to ensure you have a runway of at least five years of future living expenses covered. This allows you to ride out any equity market volatility and focus on long-term, and not one-year, returns. The rest of the portfolio is then invested in growth securities, like equities.
Investment Management with Harbor Crest Wealth Advisors
By following these three tips, you are well on your way to navigating the choppy waters of today’s market. If you would like to learn more about how to keep your portfolio on track during these uncertain times, reach out to Harbor Crest Wealth Advisors today.