Remember Your Long-Term Investing Plan During Sell-offs
With inflation being elevated and the Federal Reserve raising interest rates to bring inflation back to target levels (2-2.5%) people are increasingly worried about the potential of a recession. As a result, the S&P 500 if down about 20%+ YTD.
Whether or not the United States enters a recession in the future is not something that any investor can control, however, there are a few things you can do to protect your portfolio. Our advice is to stay the course, maintain diversification in your portfolio and protect your retirement assets if you can.
Stay the course
When big sell-offs occur in the market, investor’s emotions take over and panic sets in, which often results in selling at the exact wrong time. This could have a devastating effect on your portfolio performance over time. If possible, stay the course. Remember what your long-term investing plan is and make updates if needed. If you are worried about finances or possibly losing a job, don’t try to go all in on risky assets to try to make huge gains. Part of your money would be better off in an emergency fund in case you need it.
Don’t rebalance during a severe sell-off
If you are invested in stocks and bonds of high-quality companies with strong balance sheets, try not to re-balance during a big sell off. Wait for the dust to settle and the market to calm down before making those changes. Also, when you start to re-balance, remember what your emotions were during the sell off. If you were in panic mode and could not sleep at night, consider making your portfolio more conservative when you do re-balance so that the volatility is reduced for when the next downturn comes. We have seen people panic when the market is surging because they don’t want to “miss out”. Often times the result is buying at the wrong time.
Diversification is more than just owning a lot of different securities. Make sure your investments are spread across industries, geographic locations and company sizes. 2022 has been a good example of this. The NASDAQ, which is made up of a lot of high-growth, tech stocks is down 22% YTD while the S&P 500, a much broader index of companies, is down 13%. You may think you are diverse by owning many different tech stocks, but in the current environment tech stocks are trading as a group and most of them have declined together during this sell off. Also, if you own mutual funds, check the holdings of your funds. Many times you will find that a bunch of the funds that you own invest in the same or similar securities, so you might now be as diversified as you think with those funds.
Protect your retirement savings
If you do need to pull money out of your investment accounts to pay for essential items, try not to access your retirement funds. Any money you take out of a retirement plan will be taxed at your current income tax rate, and if you take money out of a retirement plan before age 59 ½, there will be a penalty as well. If you need to access your retirement funds, taking from a ROTH IRA first is usually the first choice.
Please let us know if you would like a complimentary portfolio review and risk assessment. More information can be found at www.chathamwealth.com or call (973)635-4275.