The first quarter of 2020 was a wake up call to every investor that markets can (and do) go down and the drop can be swift and violent. Since March 2009, investors have been able to reap the benefits of the longest bull market in history. However, the longest bull market in history came to an abrupt end in the first quarter with the Dow Jones Industrial Average shedding just over 20% of its value between February 12, 2020 and March 11, 2020 putting it in bear market territory. The S&P 500 dropped over 25% from February 19, 2020 to March 12, 2020. Needless to say, the sell off in the markets and subsequent rebound in April and May was enough to make even the most aggressive investors feel uneasy. If you are uncertain about investing in the markets right now, you aren’t alone. Below are a few tips to consider.
Have a Plan and Stick To It
When it comes to investing, there are a lot of factors that are completely out of your control. However, there are things you can control. Having a plan can help overcome some of the uncertainty. Outlining your goals, both short term and long term, is a good first step. Once you’ve outlined them, you should work to formulate a plan that incorporates things like how much you are able to save each month toward these goals and how much risk you are comfortable with taking on to try and achieve these goals through investing? After putting together a plan, put it into action and stick to it. Periodic assessments can help determine if you are staying on course or if adjustments or fine tuning need to be made.
Don’t Try to Time the Market
If you find that you are having a hard time sticking to your investment plan because market movements are keeping you up at night, it might be time to go and speak with a qualified financial professional. Trying to time the markets correctly is near impossible to do (even for so-called “market gurus” who think they can predict everything). It means you have to be right not once but twice by deciding: when to exit the market and when to get back in. A financial professional can help you assess your tolerance for risk and also help design a diversified portfolio that you can live with through various market cycles and takes into consideration your personal goals and objectives.
If you are someone who has been sitting on investable assets, but have been afraid to enter the market, consider a strategy called dollar cost averaging. You may already be employing this strategy without even knowing it if you invest in a retirement plan through payroll deductions at work. When market volatility is high (which it has been), investing money over a period of time at predetermined intervals (i.e. every month on the 15th) can take some of the emotion out of the decision of when is the best time to invest and can also potentially limit losses in the event of a stock market decline. Let's look at the hypothetical example of Bob. Bob has $10,000 he wants to invest in a fund that tracks the S&P 500 index, but is afraid of recent market volatility. Let’s assume Bob invests the full $10,000 all at once and the S&P 500 subsequently declines in value. Not ideal, as Bob’s initial investment has lost value (at least in the short term). On the other hand, let’s say Bob invests the full $10,000 and the S&P 500 subsequently goes up in value. Well, then the strategy of buying in all at once paid off for Bob in this case. Dollar cost averaging aims to find a middle ground that could potentially be an alternative to “waiting for the ideal” time to invest, which is impossible to know or predict. In theory, if markets are volatile and going up and down, buying in at set predetermined intervals means you will likely be buying more shares as markets dip and less shares as they increase. The goal is to buy in at an average cost over time. It’s not a foolproof strategy as no one can predict with certainty where markets might be headed, but it does allow an opportunity for people who may have been sitting out on the sidelines to gradually enter the market over time.
Filter Out Noise
Lastly, we think it's important to filter out noise. The most quoted market indices are the S&P 500, NASDAQ, and Dow Jones Industrial Average. You should consider the composition of these indices (and other less quoted ones) before you try and use them as a benchmark for your personal portfolio. For example, if you are a conservative investor whose portfolio consists of a mixture of different types of bonds, trying to use the S&P 500 index as a benchmark isn't that helpful, as you are essentially comparing apples and oranges. That's why we think it's important to keep things in perspective when you see flashy headlines.
Making investment decisions can be challenging for even the most experienced investors during the best of times. Experiencing the events that have unfolded during the first months of 2020 has made those decisions even more stressful for everyone. Job insecurity and concerns about the health and safety of yourself and your family has made long term planning and investment decisions seem less important, but taking the time to address these issues now can make a big difference later on.
Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. LPL Financial and Croxall Capital Planning do not provide tax or legal advice. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy assumes success or protects against a loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against a loss in declining markets.