May 2020: Tips For Managing Your Investment Account(s) During These Uncertain Times
Given the recent turbulence in the stock market, the average investor is probably experiencing some noticeable changes to their investment account balances. This month’s newsletter will focus on steps you can currently take with the investment account(s) under your control (i.e. Employer provided retirement accounts, IRAs, brokerage accounts). Now is a great time to review your account(s) and consider implementing some of the suggestions we provide throughout this article. In a previous article, we explained what asset allocation means, its importance and several variables that your respective asset allocation may be based upon. If you would like to review our asset allocation newsletter, I would recommend reading it, here, before you continue with this newsletter. Reviewing your investment accounts and ensuring that the accounts are allocated according to your respective risk tolerance, should be an exercise you perform on annual basis and during extreme market movements, like those we’ve experienced recently. If you have not done so already, now would be a good time to review the actual allocation of your investment accounts against your target allocation and rebalance your current allocation to be more in line with your target allocation. Rebalancing means to increase or decrease the amount of money (weight) you have in a particular asset class, such as stocks, bonds, or cash, in order for that asset classes percentage of the total portfolio value to match the target asset allocation percentage for that particular asset class. It may be easier if we explained with an example. Let’s assume your 401K had a market value of $100,000 and your asset allocation goal was that 70% of the account is to be invested stocks and 30% of the account is to be invested in bonds. However, due to the recent market fluctuations, your account currently has 60% or $60,000 in stocks and $40,000 or 40% in bonds. Therefore, according to your target allocation, your account would be considered over allocated to bonds and under allocated to stocks. To rebalance the account, you would need to sell $10,000 of the bond portion of your account and invest that $10,000 into the stock portion. This would give you your target asset allocation of 70% in stock ($70,000) and 30% in bonds ($30,000). Rebalancing your actual allocation to 70% stock and 30% bonds should benefit your long-term objective as you would be buying stocks when their valuations are down and should give you a better return overall for your account when the increased percentage of lower priced stocks perform better. Given the recent significant drop in the stock market, now would be a good time to review your investment account(s) and compare your actual allocation against your goal allocation. In reviewing your accounts, the portions that you invested in stocks and bonds, should be adjusted to the percentage your asset allocation goals dictate. In addition to rebalancing, now would be a good opportunity to incorporate dollar cost averaging (DCA) to your investment strategy, if you have not already done so. There is a good chance that if you are contributing regularly to your employer plan with each of your paychecks, then you are using DCA. DCA means to systematically invest a fixed dollar amount of money on a regular basis. By consistently investing the same amount, the systematic same dollar purchase should give you a better investing methodology than making potentially irrational purchases at the top and sells at the bottom of the stock or bond market. For most people, this has proven a better way of investing as it removes decision making and action for an individual as to when you invest. One final item to always consider when investing, and especially right now, is your investment time horizon. Meaning, how long before you will need to use or rely upon the funds that you are currently investing. The longer your time period (horizon), the more risk or volatility you can potentially accept, because you have more time to make up for losses that may occur during the investment period. A time horizon is considered short when it is less than five years, intermediate when it is five to ten years, and long term when it is greater than ten years. Given the current market conditions, those accounts that have intermediate and long-term time horizons should be re-balanced to effectively take advantage of recent asset class losses, like stocks. Those with short-term time horizons must take their perspective goals and market risk more into consideration. If you have a short-term time horizon, you should review your target asset allocation and potentially adjust the level of risk. The level of risk can be changed by increasing your bond and cash exposure, which should help you preserve the wealth you have successfully built up. Our world is facing a lot of uncertainty right now, but it is during periods of uncertainty when we must consider seizing the opportunity. By following your asset allocation goal that is appropriate for you and making appropriate adjustments, this financial market volatility should work to your advantage over the long term. If you have any questions pertaining to the concepts mentioned above, please contact us.