- Money needed in the near term is invested in cash or conservative bonds such that those needed moneys are not subject to the volatility of the stock market.
- Different investments in the portfolio can move in different directions relative to each other and the market in general (their correlation). We mentioned the S&P is down about 10% year to date; the aggregate bond index is up approximately 2% in the same time period.
- A subset of the correlation argument is use of alternative assets where the investment itself or the investment manager’s style is designed to give some portfolio protection in a declining stock market. Mutual funds utilizing a “long/short” or “market neutral” strategy are available to provide some loss protection and still maintain liquidity. Obviously the quality of that investment is highly dependent on the fund manager and fund strategy; care should be taken when integrating such assets into a portfolio.
Preparation is great, but it’s an historical thing. If it’s not done before now, you may be too late. So what does an investor do now? Consider the following:
- Review the cash needs from the portfolio for the next several years. Do you have sufficient cash or investments with gains to cover those needs? If so, you can “wait it out.” You have no need to go into panic portfolio liquidation.
- Almost every diversified portfolio will have some assets with a gain—especially if they have been in the portfolio for a while. Do some “tax harvesting” where assets are sold and the gains of the “winners” are offset by losses of the “losers.” This action results in avoiding taxation on the gain and allows resetting cost basis on investments in the future.
- What did you do the day after Thanksgiving? Millions of Americans went shopping because things were “on sale.” Apply the same mindset to the stock market. Stocks are currently going “on sale.” Investors may have hard time thinking about adding to positions in such markets, but for the right stocks and in the right portfolios, these times may be buying opportunities.
We are not saying “do nothing.” We are saying that an investor should review his/her current portfolio in view of the investor’s needs/long term goals and should consider the composition of the portfolio. Wholesale selling in a down market usually works to the investor’s disadvantage. In addition, tax consequences of selling at a loss can be tricky and should be done with tax consultation. Also, buying declining securities of companies should be considered carefully—is the decline of stock price related to the general market sell-off or is there a systemic problem with the company?
We, at Paragon Financial Advisors, will be happy to discuss your portfolio and circumstances with you in these “interesting” times. Please feel free to contact us. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.
NOTE: All investing involves some degree of risk and possible loss of principle. Stock offer greater long term growth potential but may have wider and greater price fluctuation while yielding lower current income. Bonds may involve credit/default risk resulting in loss of principle; they historically have provided consistent income. Alternative investing and techniques are specialized situations and should be used only when one understands the risks and restrictions involved. Nothing in this discussion should be construed as a general investment recommendation; appropriateness is dependent on the investor and his/her particular circumstances.