For most, accumulating wealth isn’t the result of a windfall event. It’s the product of years of hard work and financial discipline. When you’ve invested so much time and effort into securing your financial future, you want to make sure you do what you can to protect it or sustain it for future generations.
While overspending, poor investment planning or other threats to wealth may be reasonably managed, individuals have little influence on the fluctuations of the economy and markets or public policy decisions. That volatility can have significant impact on asset values, though, in relatively short order.
Over the long term, investing in the markets is likely to lead to significant growth, but to get there, you’ll also have to endure the market’s valleys. How can you endure unpredictable market swings to protect your financial security?
Don’t Panic
When volatility hits it feels natural to want to pull investments from a turbulent market and shield yourself from further losses. It’s important to remember, though, that investing is inherently a long-term process. Just as there are very few quick wins, significant losses over the long-term are also rare.
Panic selling when the market slides just locks in a loss and forfeits any opportunity to benefit when the market rebounds. It’s important to keep in mind that generally, the market overall grows more during a bull market than it contracts during a bear market. If you’re not relying on your investments to pay everyday expenses, holding firm during times of volatility can be the best policy.
Rebalance Your Portfolio
Exiting the market entirely forfeits growth, but that doesn’t mean you shouldn’t re-evaluate your investing plan. Uncertainty in the markets can be a good time to consider the investment mix in your portfolio and whether it’s weighted most advantageously for you.
Your ideal investment mix will be unique to you and your wealth goals. Over time, as the value of certain assets grow or others decline, your portfolio can fall out of balance, leaving you potentially overexposed to a certain asset class.
Rebalancing involves buying or selling assets to bring your portfolio in line with your risk tolerance and preferred weighting that best moves you toward your financial goals. Generally, rebalancing is good preventative maintenance for your portfolio. With your advisor, you should consider revisiting the asset mix in your portfolio on a scheduled basis as a risk management buffer against volatility when it hits.
Consider Tax-Loss Harvesting
A down market may be the right time to reduce taxable income through tax-loss harvesting. Tax-loss harvesting is selling assets at a loss – to reduce your capital gains income – and reinvesting those proceeds into a new investment.
Tax-loss harvesting fills a dual purpose. It reduces your taxable income while allowing you to re-invest those proceeds into potential future gains. It can be an effective way of rebalancing your portfolio especially during times of market swings that are producing both wins and losses for your investments. It’s important to consult with your wealth and tax advisors when considering tax-loss harvesting to ensure you’re in compliance with IRS regulations.
Keep Sufficient Cash Resources
We’re often cautioned about the risks of holding on to too much cash, primarily due to the opportunity cost of the potential income generated if that cash was instead invested in the market. While holding cash simply to avoid investment risk may be bad practice, having sufficient cash resources available can be beneficial, especially during times of uncertainty in the markets.
Principally, having cash on hand for expenses prevents the need to sell investments in a down market – potentially at a loss. If you’re planning on making a major purchase in the short-term, such as an investment property, leisure vehicle or other large expense, building your cash reserve in advance can allow you to pay, while still allowing your investments to avoid losses.
Balance Exposure to International Stocks
It’s important to include international stocks as part of a well-diversified portfolio. They balance risk and can outperform portfolios composed of only domestic stocks. But like anything, the key is balance. In an environment of volatility and trade disputes, international companies can face higher business costs that can effect consumer prices and the valuation of their stock.
The solution is not to avoid investing internationally, but to pay attention to the balance of international investments in your portfolio and how those investments may be impacted by current events. Rebalancing your portfolio to remedy overexposure can help mitigate the market’s swings.
Seek Professional Guidance
A wealth advisor can’t perfectly predict the market – it’s an impossible science. But an advisor can help you navigate and limit emotion-based investment decisions during periods of volatility. They can help advise on investment decisions and portfolio adjustments based on your unique financial needs.
When you’ve spent a career earning and growing wealth, a market downturn or economic turmoil can justifiably be worrisome. Including an advisor as part of your wealth maintenance strategy can help put you in position to both weather volatility or make necessary adjustments to see your investments through to more stable times.
