• Brenden Leese, CFP®

Benefits of a Volatile Market


Key Takeaways

  • Markets go in cycles. Time in the market matters far more than timing the market.

  • Now can be a good time to reduce your largest holdings and/or harvest losses to reduce your tax bill.

  • Now can also be an excellent time to dollar-cost-average (read on for tips).

Although it’s concerning to see your portfolio continue to decline, there is a silver lining to today’s volatile market conditions:

  • The “loss” you are experiencing in your portfolio only becomes a reality if you decide to sell or go to cash. It is important to understand that short-term fluctuations are normal and that over the long term, the markets have risen.

  • It could be a good time to take advantage of some of your current “losses” to help reduce your tax bill. We call that “loss harvesting.” We cannot control the market, but we may be able to make strategic moves to help from a tax perspective in these times of market downturn.

  • If you have large, concentrated positions from your employer’s stock or other companies you’ve held for many, many years (think JNJ, Apple, Microsoft, AT&T) it could be a good time to sell some of those assets and diversify your portfolio.



Here are the hardest things for investors to understand in a down market:

1. The market goes in cycles. In the short term, the market will not go up forever as we learned this year. It also won’t go down forever, as we’ve seen over the last few weeks. Never sell in a panic because of headline fear. It is important to tune out the noise from the media. Over a long timeframe, think 15-20 years out, the market will end up higher than it is today. This is why it is important to understand that the short-term swings we see are simply a part of the ride as the market goes through its cycles on the way up.

2. You can’t time the market. Many investors think they need to be in cash when they feel they’re losing all their money in a down market. But if you do that (sell low), you have to know exactly when to get back into the market. Otherwise, you’ll miss out on the eventual runup when markets recover. It’s almost impossible to time the market and predict the right re-entry point. If you can follow the old adage of “buy low, sell high” you can align yourself well with the recovery. Study after study shows the benefits of staying fully invested for the long-term. You can always adjust your portfolio. Just make sure you stay in the game.

3. “This time it’s different.” We hear this all the time from so-called experts, but today’s bear market is really not all that different from most other downturns we’ve seen, including the sharp selloffs of 2008 and 2020. Yes, there are different circumstances triggering today’s bear market (interest rates, inflation, Russia-Ukraine conflict), but it’s always driven by uncertainty. There was uncertainty during the global financial crisis bear market of 2008, just like there was uncertainty during the COVID-driven bear market of early 2020. It’s not necessarily something new. Don’t feel you have to do anything rash during this particular downturn.

4. It’s okay to sell some of your employer stock. It doesn’t mean you’re being disloyal. Holding onto concentrated positions for so long that you can’t get out of them poses a big threat to your overall plan (see case study below).

5. Dollar cost averaging (aka constant dollar plan). Dollar-cost averaging means investing the same amount of money in target asset classes of securities at regular intervals – such as every paycheck, on the 15th of every month, or once per quarter, etc. -- regardless of price. You’re not thinking about it or trying to time the market. It’s automatic. In essence, you’re getting more of a desired asset for the same amount of money. This lowers your average cost and reduces the impact of volatility on your portfolio. Dollar cost averaging will help you lower downside risk if the market takes a sharp or steady decline. You may already be dollar cost averaging without knowing it by contributing to your 401k, your 529, or savings account on a monthly basis.

We spend a lot of time educating our clients about the five fundamental concepts above. By taking advantage of these strategies, you can benefit from adverse market conditions and put yourself in a better spot for the eventual recovery.

Real-world example

A client of ours was on pace to retire early. He was an excellent saver and had accumulated a large chunk of company stock from the tech company where he worked. But that single stock accounted for a huge portion of his overall portfolio. As he got closer to his (early) retirement date, that stock was sitting at an all-time high of well over $200/share. We strongly recommended that he sell some of it and diversify his portfolio, but he seemed to have blinders on in thinking that the company, and the market, would continue to trend upward as it had been doing for months-on-months at that point.

As often happens, our client got emotionally attached to the company stock and felt like he’d be betraying the employer if he started selling before retirement. But then the company fell on hard times. Nevertheless, he held on to the stock throughout its reversal and his stock was recently trading well below $100/share. Since so much of his nest egg was tied up in company stock, his nest egg was worth two-thirds less than it was just a few short years ago. It was a tough lesson about loyalty. Finally, he saw the light, took our advice, and started diversifying his portfolio – primarily outside the tech sector. Slowly but surely, he’s getting back on track, but he’s had to delay his early retirement by several years.

Conclusion

By having an objective eye (and a fiduciary) on your portfolio, we can work through these different strategies with you if we see an opportunity. Novi clients know we always have our eyes open for opportunities on their behalf. And there will be plenty of opportunities in a market like this one.

If you or someone close to you has concerns about your investment plan or retirement plan, please don’t hesitate to reach out. We have helped many clients in the same situation.

 

BRENDEN LEESE, CFP® is an Associate Wealth Advisor at Novi Wealth Partners