Stocks Will Rise… and Fall:  A Clinical Approach for What to Do Now

Unlike two years ago when in January we saw the largest start-of-year decline in the history of the S&P 500, this finance stocks rise fall portfolioyear stocks soared out of the gate and it appeared good times would roll on. That changed abruptly and investors are left wondering what they should do now?

Before providing a specific recommendation for how I believe every thoughtful investor should respond, allow me to address two important points.

Unnerving Correction. The downdraft we saw at the beginning of February was especially challenging for many because of it’s speed (one of the quickest declines of 10% we’ve ever seen) and the fact that it followed one of the calmest years in the history of stocks (no declines of greater than 2% in the S&P 500 last year).

Healthy Correction? While only time will tell if this decline is constructive or instead leads to a bona-fide bear market and real pain, we feel it’s more likely a healthy sell-off that brings valuations to more reasonable levels. We base this on the fact that this correction wasn’t triggered by fears of a recession but interestingly just the opposite; accelerating growth leading to higher rates potentially generating competition for stocks. We’re also encouraged that we didn’t see indiscriminate selling of risk assets – one example being the relative outperformance of emerging market stocks.

So back to how investors can thoughtfully respond to this changed environment. Given that no one can predict with certainty how stocks or bonds for that matter will perform, we strongly advocate adopting a clinical approach.

 

  1. Re-assess your risk/return profile. Simply put, do you truly need to take on the risk and strive for the returns expected from your current allocation? Consider it a luxury to ponder this question with markets at these levels.

 

  1. Adjust any of your Three Levers as necessary: Remember that all Three Levers – Inflows, Outflows and Expected Return – might deliver your solution. If you can’t bear the thought of your portfolio dropping, say, 20 percent, consider modifying inflows (e.g. – a nonprofit might step up fundraising allowing for a less risky portfolio allocation) or delaying/eliminating outflows.

 

  1. Thoughtfully diversify. Even with recent declines very few asset classes appear to have cheap valuations and as a result, broad diversification is almost a necessity. But remember there’s no guarantee stocks will falter and trying to time the market is often a loser’s game.

 

  1. Thoughtfully rebalance. Adopting a disciplined approach to selling winners and reinvesting according to plan makes perfect sense and becomes particularly important in volatile markets.

 

  1. Be disciplined when things get rough. The return of volatility can be unsettling so it won’t shock me if investors react poorly. But by following this clinical approach you will have affirmed your objectives and why your portfolio is positioned as it is. Knowledge truly can be power – and you’ll have it. It’s also helpful to appreciate that the typical bear market lasts less than 18 months: click here.

It does not matter much that stocks will rise and fall. What truly matters is whether you will take a clinical approach to overseeing your investments. Absent some essential information, I can’t tell you if you should up your allocation to stocks or cut back. However, I can say that now seems like a superb time to assess your allocation and to, as one wise CFO once told me, minimize your maximum regret.

As always, please feel free to contact any of our financial advisors at New England Investment and Retirement Group, Inc. for assistance.

While this article addresses generally held investment philosophies of New England Investment and Retirement Group, Inc., it does not represent a specific investment recommendation for any individual client or prospective client. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice. Information has been obtained from a variety of sources believed to be reliable but not independently verified. Past performance does not indicate future performance.

This report is intended for the exclusive use of clients or prospective clients of New England Investment and Retirement Group, Inc. Content is privileged and confidential. Any dissemination or distribution is strictly prohibited.