byLaurie Wexler Gerber, MBA, Director of Marketing
There has been much discussion recently in the financial press about whether the stock market is reaching its peak. We at GW & Wade are not in the business of predicting market moves. For example, who could have foreseen the market run-up after the recent election? In the interest of addressing this question, however, here is some of our thinking about market tops and bottoms. (To define terms, a market correction is generally considered to be a drop of approximately 10%; a bear market is a drop of approximately 20%).
Are there things I can do during a market down-turn?
At GW & Wade, we have worked with our clients’ investments since our founding in 1986. This means we have experience with the significant market swings of 1987, 2001, and 2008-09…to mention just a few. In each case, there was great anxiety during the downturn, followed by mild to great euphoria on the following upturn. And sometimes the anxiety and euphoria overlapped amidst the market volatility. To help our clients think about the current environment, here are several steps which we have recommended throughout previous volatile markets, which also apply in the current context.
Asset Allocation and Diversification—While it does not make headlines, maintaining a well-diversified portfolio, across several different asset classes, is the first, most important strategy to help you through volatile markets.
Rebalancing—Big market moves can offer a chance to re-allocate portfolios, and bring them back in line with your target asset allocation. When one asset class experiences a significant gain (for example, large cap stocks throughout the late 1990’s), you might consider taking some of those gains off the table and re-allocating to other asset classes. Rebalancing and then buying a depressed asset class is potentially a good strategy to return your portfolio to your target asset allocation.
Tax-Loss Harvesting—Take advantage of your losses, by “harvesting” them to off-set your gains; this typically reduces your tax bill. And if using your losses in one year alone is not to your benefit, in some instances tax losses may be “carried forward” to future years.
Be Patient—The market crash of 1987 took 13 months to reach its pre-crash level; the 2008-09 crash took 17 months to recover. In retrospect, these durations do not seem particularly long. But they sure did at the time! And it bears mentioning that the portion of your portfolio allocated to equities should not be viewed with only a 12-24 month time-frame anyway. A minimum of 3-4 years is more like it. Patience can solve many problems engendered by market volatility.
Avoid Market Timing—There is an endless supply of data to prove how ill-served investors are by trying to time the market. And as we know, you have to get it right twice: when to get out and when to get back in. Paring down and reallocating an asset class which has performed well is quite different from timing a complete exit from, or re-entrance into, your equity positions. Don’t do it!
Strategies to consider prior to the next large market move
Market volatility and emotion do not blend well. So having a sound strategy in place prior to large market moves can remove emotion from your decision-making. We encourage you to be in touch with your GW & Wade Counselor to discuss these strategies and to consider which may apply to your unique circumstances.
Have I reviewed my asset allocation? Is it current?
Are my sources of income intact, to avoid needing to sell equities during market lows?
Have I talked with my Counselor and discussed our strategy, should the market head down?
We are happy to provide these general guidelines to help you through any coming volatility. Most important, we encourage you to contact your GW & Wade Counselor to discuss your unique, individual situation.
The information provided above is general in nature and is not intended to represent specific investment or professional advice. No client or prospective client should assume that the above information serves as the receipt of, or a substitute for, personalized individual advice from GW & Wade, LLC, which can only be provided through a formal advisory relationship. Diversification and asset allocation do not ensure a profit or guarantee against loss.
Clients of the firm who have specific questions should contact their GW & Wade Counselor. All other inquiries, including a potential advisory relationship with GW & Wade, should be directed to: