What to do with investments? Focus on what you can control
Much of the unease investors are feeling these days reflects a sense that things have gotten out of hand.
Since the beginning of the year, stock and even bond prices have been affected by rising inflation, the war in Ukraine, fears of a recession and other pressures. Individuals cannot do much about this, but there are many other aspects they can control.
Here are some investing steps you could take if you’re feeling anxious about general trends and want to focus on the financials you can control:
Check your diversification
Diversification is a key concept in investing. Because the return on investments is unpredictable, especially in the short term, the idea is to distribute your wealth among different assets that do not all evolve at the same pace. A diversified portfolio doesn’t provide guarantees against occasional losses, but it does bode well for a smoother ride overall.
But investors are sometimes less diverse than they think and find out when market conditions get tough. For example, owning three stock funds won’t provide the protection you’re looking for if all three hold the same types of stocks, said Fountain Hills registered investment adviser Susan Linkous. It is therefore wise to check your investment holdings from time to time to see how well your portfolio is really spread.
Diversification is not just about holding stocks, bonds and cash — the three main pillars. You would also want to hold different categories of each, especially on the stock side. Opportunities include both large and small US stocks as well as foreign holdings.
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Rebalance if necessary
With financial markets rebounding lately, you may want to rebalance your holdings. This means adjusting your portfolio to your original asset mix or allocation.
Say your goal is to hold 60% of your assets in stocks or stock funds, and 40% in bonds and bond funds, to give a simple example. It might be time to get back to the original mix if you are now 55% stocks and 45% bonds.
Rebalancing is a way to make incremental adjustments rather than all-or-nothing changes inside or outside the market. It can also represent buy low and sell high discipline since you’re typically taking money out of investments that have been hot lately and diverting it to those that have lagged.
Rebalancing works best with funds that hold dozens or even hundreds of stocks rather than a few individual stocks or bonds, which can sometimes crash and never recover.
The idea of rebalancing assumes that you have a target investment mix as part of a comprehensive financial plan. If not, it might be time to draft one, possibly with the help of an advisor.
“It’s all about planning,” said Dawn Dahlby, behavioral financial advisor at Relevé Financial in Scottsdale. A solid plan with the right mix of investments, clear goals and well-defined priorities “takes the fear away,” she said.
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Look for new opportunities
Besides rebalancing, which is mostly about making adjustments among the investments you already hold, you may also want to broaden your horizons to new areas.
Many investments are selling today at much lower prices than at the start of the year and could represent bargains. Linkous considers municipal bonds and muni-bond funds as a good example. Some pay tax-free returns similar to taxable returns on other bonds, she said.
Nadia Papagiannis of Northern Trust Asset Management suggests investors consider adding mutual funds or inflation-hedging exchange-traded funds to their portfolios. His favorites include funds that hold natural resource stocks, high-yield bonds, high-dividend stocks and TIPS, or inflation-protected Treasury securities.
Each of those categories could continue to hold up relatively well in an ongoing environment of high inflation and rising interest rates, said Papagiannis, who manages model and multi-asset portfolios for Northern Trust in Chicago. She doesn’t suggest jumping into these areas entirely, but sees them as complements to a more traditional mix of stocks and bonds so investors can prepare for “all types of scenarios.”
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Maintain the flow of investment contributions
You don’t want to stop adding new money during market declines. In fact, these times can be especially good for bargain hunting for investing.
If you participate in a 401(k)-style retirement plan through work, you probably already do, with a portion of each paycheck going toward your investment choices. This is one of the advantages of an automatic investment plan: you don’t have to think about every transaction. You also end up buying stocks at different prices, which is the idea behind dollar cost averaging. Following an averaging strategy is often more prudent than putting in a wad of cash at a time.
Additionally, Linkous suggests reinvesting dividends and capital gains distributions into other assets if you don’t need to live off that income. “That assures you at least a dollar buy average,” she said.
Conversely, if you’re leveraging your investment portfolio to generate income, bear markets can be a good time to exercise more control over when you sell stocks and withdraw cash.
“Consider disabling automatic sell and transfer orders” and instead withdraw money, if you must, from investments that have held up better, she said.
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Take a long-term view
Despite sometimes painful fluctuations along the way, financial markets tend to generate fairly consistent and predictable long-term results. For example, annual stock returns have averaged around 10% to 11%, including dividends reinvested over time. Investing is primarily a long-term pursuit, so it makes sense to maintain a multi-year perspective.
Through May 25, the 100th trading day of 2022, the stock market had one of its worst starts in history, with the Standard & Poor’s 500 index dropping 16.5%. But after the previous five worst annual starts – in 1932, 1935, 1940, 1962 and 1970 – stocks have rallied each time, rising by a median of 15% over the rest of those years, reports LPL Financial.
All of these other downtrends in the market, like now, also coincided with wars, economic crises, and/or inflation fears, but selling eventually declined.
“Previous poor starts have seen some nice elastic raises, and 2022 could be in line to do that again,” said Ryan Detrick, LPL’s chief market strategist.
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