Market volatility is back again, and it is not showing signs of easing in the immediate future. The Cboe VIX, also known as Wall Street’s “fear gauge”, has hovered over its longtime average of 20 for the better part of the year. As this article is being written, other major indices, such as the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average are also down 18.20%, 27.88% and 13.93%, respectively. However, even with an endless stream of bad news, not all hope is lost in a negative market.
Down markets provide significant opportunities for investors to add value to their portfolios. Market corrections are a nearly-inevitable part of a regular market cycle that happens every seven to 10 years. By purchasing holdings at a discount and rebalancing opportunities, having a set path and a disciplined approach can leave one in better standing when the dust settles. Here are a few tips to take advantage of a bear market.
If you purchase stock ABC at $100 per share and the market drops by 20%, your share is now worth $80. Selling the share would fully realize your loss, meaning that you would lose $20, and without reinvesting that $80 from the sale, its value has no chance to increase. Another example is having shares in Company XYZ at $100 per share dropping to $50 per share in a market correction. In order for you to get back to your starting point, the stock would have to appreciate by 100%, or $50 x 2. While that might sound daunting, your losses are only realized once you sell, and historical trends show that markets tend to bounce back over long periods of time. This leads us to our next tip.
Don’t try to time the market.
Timing the market is nearly impossible. Investors and money managers have done it in the past, but there isn’t a method to do it consistently, at least so far. The point at which an investment will peak or bottom out is a mystery, and fretting over incremental changes defies the only supportable truth we do know about the market: there are ebbs and flows. According to Putnam research, missing the best 10 days in the market from Dec. 31, 2006 to Dec. 31, 2021 could have cost an investor $24,753 during a 10-year period! When could the best 10 days occur? It’s anyone’s guess. The best practice is to trust long-term trends and to consult your financial professional. Getting in and out of the market could cost thousands, if not hundreds of thousands of dollars over a long period of time.
Have the right allocation.
This goes hand-in-hand with our first point. Having the right amount of market exposure is critical to any portfolio. If an investor is going to retire next year and has 100% exposure to the market, that individual participates in the entirety of the market’s up and downs. That would mean that every dollar would be at risk until adjustments are made. A crash or decline in the year before retirement could spell trouble for that investor. According to research by Guggenheim, S&P 500 declines of 40% or more since 1946 have taken an average of 58 months to recover, potentially forcing that investor to stay in the workforce for nearly five more years if they do not reallocate funds. Realistically, in the midst of a 40% market decline, most individuals would panic and exit the market. As discussed earlier, these changes would fully realize those losses, prolonging the recovery even further. Overexposure, which typically means an investor has too many assets without a more certain or guaranteed growth rate, can also be problematic for investors. It’s very normal to have some assets invested in the market, but more assets in the market means more risk, and that can be dangerous for those close to retirement.
Rebalance or deploy cash.
Rebalancing your investments brings them back to their optimal allocation. That could mean redistributing assets among various guaranteed and non-guaranteed investments, or it could mean taking advantage of trends. For example, selling positions that have outperformed other investments in the market might allow you to cash in on those gains. Those gains could then be used to reinvest in other holdings at a discount. While, again, timing the market is an inexact science that could go awry for even those with decades of experience, declines can offer a chance to enter the market at a discount. In the earlier example, an investor purchased stock ABC for $100 and panic-sold for $80. Someone, somewhere, purchased that stock for $80. While there’s a chance it could continue to drop, there’s also a chance the market bounces back and pushes the stock to $100 or higher.
Finding the right balance between action and research can be daunting at times. Reach out to Sun Valley Financial for a no-obligation consultation at 602.960.0362 to review your investments strategies and see how they stack up against your goals. As always, check with your tax and financial professionals before making any changes. Until next time, stay well!