On Monday, August 24th we sent an email to our clients describing our thoughts on the recent stock market volatility. This was a proactive effort on our part. Not surprisingly, very few of our clients had called in with panic in their voices. Those who did contact us were much more interested in adding money to their accounts, not running for the hills.
If you’ve been a client of ours for some time (i.e. through a full market cycle) none of what we’re about to tell you should come as a shock. We offer these tips and tidbits here as a friendly reminder that we’re in the trenches fighting for you (our client) every day.
Is this a correction or the start of a bear market?
We believe it’s the former. Bull market corrections historically occur about every 18 months, but we’ve enjoyed a correction-free period since 2011. Since this one is four years in the making, it’s long overdue. This is a classic example of overreaction and panic. The CNN Fear and Greed Index, which summarizes seven measures of market sentiment, showed its highest reading of “Extreme Fear” on Monday, August 24th, which is normally associated with a bottom in stock prices.
In U.S. market history there have been 35 corrections of 10% or more. Of those 35, it has taken an average of only 10 months before the index has fully recovered the loss. Although there are no guarantees, we can rely on history as a guide.
“When life gives you lemons, make lemonade.”
Tax-loss harvesting is just a fancy way of saying we sell the losers in taxable investment accounts, recognize the loss, and transfer it to your tax return. The IRS allows you to offset investment gains with investment losses, and they even allow couples to take up to $3,000 in losses against ordinary income each year. Any losses that can’t be offset against gains or income are carried forward for future use. We have yet to meet anyone who wants to pay more in taxes (except Warren Buffett), so we’re constantly on the lookout for tax swaps during periods of stock market declines. A hypothetical example would be selling AT&T and recognizing the loss, then buying Verizon with the proceeds.
Update or initiate a financial plan.
If this market tumult is preventing you from sleeping well at night or is causing you angst, let’s update your financial plan. Often just going through the planning process can be reassuring to clients. If we haven’t done a financial plan for you yet, well there’s no time like the present. Why put off until tomorrow what you can do today? We have a simple two-page fact finder and our planning program is visual and interactive. Feedback from our clients who’ve gone through the planning process has been excellent.
Tune out the media.
Fear and greed are the two most common emotions when it comes to investing. As a result, the media plays on these whenever they can. Newspapers are in the business of selling papers and driving traffic to their websites. TV programs sell advertising, which is a function of the number of eyeballs watching. Sensationalism is the norm these days. Markets don’t simply fall, they plummet! They don’t go up, they soar! P&A isn’t into sensationalism. It’s our aim to add perspective to our clients’ financial lives. That magazine isn’t your financial advisor. They don’t know the intimate details of your financial life or your goals and plans like we do.
Maintain a long-term perspective.
Market timing doesn’t work. Studies show that investors earn 4% less than the investments they’re in. So because of their “timing” strategies with ABC Mutual Fund, investors end up with a significantly lower return than ABC Mutual Fund actually delivered. Long term is the only term when investing. Tune out the short-term noise and enjoy some of our favorite quotes about market timing:
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections than has been lost in corrections themselves.” – Peter Lynch
“I can’t recall ever once having seen the name of a market timer on Forbes’ annual list of the richest people in the world. If it were truly possible to predict corrections, you’d think somebody would have made billions by doing it.” – Peter Lynch
“Only liars manage to always be out during bad times and in during good times.” – Bernard Baruch
We believe this is a stock market correction. We will not attempt to time the market, because it’s fruitless to do so. It’s in our DNA to be proactive in harvesting losses in taxable accounts, to review and update financial plans for clients interested in doing so, and to remain fully invested to our clients’ respective asset allocation. What you should do is tune out the media and resist the urge to make drastic changes to your portfolio. There is a direct correlation between building wealth via the stock market and not obsessing over each day’s or week’s or month’s stock market moves.
For those of you who are losing sleep or have continued concerns, please call us. You have hired us to be your emotional surge protector and to represent your best interests at all times. We are here to listen, help, and talk you through this. Thank you for being our client.