What should you do with Investments? Focus on what you can control
A lot of the unease investors are feeling these days reflects a sense that things have gotten out of control.
So far this year, stock and even bond prices are getting battered by rising inflation, the war in Ukraine, concern over a recession and other pressures. Individuals can’t do much about any of that, but they can control many other aspects.
Here are some investment steps you might take if you’re feeling anxious about big-picture trends and want to focus on financial aspects that you can control:
Check your diversification
Diversification is a key concept in investing. Because investment performance is unpredictable, especially over the short term, the idea is to spread your wealth among different assets that don’t all move in lockstep. A diversified portfolio doesn’t provide guarantees against occasional losses, but it does augur for an overall smoother ride.
But investors sometimes are less diversified than they think and find out when market conditions get rough. For example, owning three stock funds won’t provide the protection you seek if all three hold the same types of stocks, said Susan Linkous, a registered investment adviser in Fountain Hills. It’s thus wise to check your investment holdings from time to time to see how spread out your portfolio really is.
Diversification isn’t just about holding stocks, bonds and cash — the three main pillars. You’d also want to hold different categories of each, especially on the stock side. The possibilities include both large and small U.S. stocks along with foreign holdings.
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Rebalance if necessary
With the financial markets bouncing around lately, you might want to rebalance your holdings. This means adjusting your portfolio back to your original asset mix or allocation.
Suppose your goal is to hold 60% of your assets in stocks or stock funds, along with 40% in bonds and bond funds, to cite a simple example. It might be time to rebalance back to the original mix if you’re now at 55% in stocks and 45% in bonds.
Rebalancing is a way to make gradual adjustments rather than all-or-nothing switches in or out of the market. It also can represent a buy-low, sell-high discipline since you typically are moving some money out of investments that are hot lately and diverting it into those that have lagged.
Rebalancing works best with funds that hold dozens if not hundreds of securities rather than a few individual stocks or bonds, which sometimes can collapse and never recover.
The idea of rebalancing assumes you have a target investment mix as part of a comprehensive financial plan. If not, it might be time to draw one up, possibly with the help of an adviser.
“It’s all about the planning,” said Dawn Dahlby, a behavioral financial adviser at Relevé Financial in Scottsdale. A solid plan with a suitable investment mix, clear goals and well-defined priorities “takes away the fear,” she said.
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Look for new opportunities
Besides rebalancing, which mostly involves making adjustments among investments you already hold, you might also want to expand your horizons to new areas.
Many investments are selling at much lower prices now than at the start of the year and could represent bargains. Linkous considers municipal bonds and muni-bond funds as a good example. Some are paying tax-free yields similar to the taxable yields on other bonds, she said.
Nadia Papagiannis of Northern Trust Asset Management suggests investors consider adding inflation-hedging mutual or exchange-traded funds to their portfolios. Her favorites include funds that hold natural-resource stocks, high-yield bonds, high-dividend stocks and TIPS, or Treasury Inflation Protected Securities.
Each of these categories could continue to hold up relatively well in a continuing environment of high inflation and rising interest rates, said Papagiannis, who manages model and multi-asset portfolios for Northern Trust in Chicago. She doesn’t suggest moving entirely into these areas but views them as complements to a more traditional stock and bond mix so that investors can prepare for “all types of scenarios.”
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Keep investment contributions flowing
You don’t want to stop adding new money during market downturns. In fact, these can be especially good bargain-hunting times to invest.
If you participate in a 401(k)-style retirement plan through work, you’re likely already doing this, with a portion of each paycheck going into your investment choices. That’s one benefit of an automatic investment plan — you don’t need to ponder each transaction. You also wind up buying shares at different prices, which is the idea behind dollar cost averaging. Following an averaging strategy often is more prudent than putting a wad of cash to work all at once.
Also, Linkous suggests reinvesting dividends and capital gain distributions on other holdings if you don’t need to live off this income. “This assures you of at least some dollar-cost averaging,” she said.
Conversely, if you’re tapping your investment portfolio for income, down markets can be a good time to exert more control over when you sell shares and withdraw money.
“Consider turning off automatic sell and transfer orders” and instead pull money, if you must, from investments that have held up better, she said.
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Take a long-term view
Despite occasionally painful fluctuations along the way, the financial markets tend to generate fairly consistent and predictable long-term results. For example, annual stock returns have averaged about 10% to 11% including reinvested dividends over time. Investing is mostly a long-term pursuit, so maintaining a multiyear outlook makes sense.
Through May 25, the 100th trading day of 2022, the stock market suffered through one of its worst starts ever, with the Standard & Poor’s 500 index slumping 16.5%. But following the five prior worst yearly starts — in 1932, 1935, 1940, 1962 and 1970 — stocks rallied each time, rising a median 15% over the remainder of those years, reports LPL Financial.
All of those other market downdrafts, like now, also coincided with wars, economic slumps and/or inflation fears, yet the selling eventually abated.
“Previous bad starts have seen some nice rubber-band snapbacks, and 2022 could be in line to do it once again,” said Ryan Detrick, LPL’s chief market strategist.
Reach the reporter at russ.wiles@arizonarepublic.com.
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