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We all need money management advice, whether you’re an experienced investor or a young adult trying to purchase your first home. MassMutual’s team is here to help.
Today’s insights on keeping calm during market downturns come from Jerry Facey, a wealth advisor with Baystate Financial in Boston, Massachusetts.
Q: What advice do you give clients when the stock market (and their portfolio balance) is down?
A: When client’s experience significant statement pain resulting from market losses, I don’t try to talk them out of their feelings — none of us likes to see our balances go down! However, I share the lens of history, and what it can teach us about corrections and bear markets. (Learn more: War with Iran: Analyzing the market challenges)
Historically speaking, the markets have gone up a lot more years than they have gone down. And to date, every bear market has been followed by a rebound, although past performance is never a guarantee of future results. Bad news always comes in a bigger font than good news. (Related: Preparing for volatility)
Take 2020, for example, when the COVID pandemic hit; the S&P 5001 went down 35 percent in 34 calendar days. When every single headline in late March and April 2020 was terrible, the market began its incredible rebound.
Being an investor takes some intestinal fortitude. Together with my clients, we examine their goals, and discuss if they’ve changed in any way, or is it just that the statements have changed recently? If their time horizon is the same or similar, and their desired rates of return are the same as they were when the balances were better, then why would we become more conservative now? We’ve always heard that LOW is the wrong time to SELL. Some of these discussions have led to people adding to their investments, because they realize that perhaps it is an opportunity to “BUY LOW.” (Related: When markets dive, keep your strategic calm)
Market sell-offs can also be a time to remind investors of the merits of dollar-cost-averaging methods. This is how 401(k) plans work by nature — by investing a set amount, at a set periodic frequency. I aim to get clients to employ that same discipline to their non-retirement investment accounts as well. By using this method, when the market is lower, their dollars buy more shares, and when higher, they buy fewer shares, whether it’s a mutual fund, ETF, or basket of stocks. In this way, at the end of, say, a year or two, they’ve bought more shares when the prices were relatively lower, and fewer shares at times when they had peaked. However, it’s important to remember that dollar-cost averaging does not assure a profit or protect against loss in declining markets. (Related: What is dollar-cost averaging? Does it work?)
In conclusion, many of us are hardwired to act on a perceived solution when we think there is a problem. The reality is that the cyclical nature of markets isn’t necessarily a problem; it’s simply a component of long-term investing. We account for this by building a diversified portfolio2 based on a client's goals and risk tolerance. Enduring market lows has historically been necessary to potentially benefit from the highs in the pursuit of long-term success.
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1 The S&P 500 Index is a widely used gauge of the large-cap U.S. equities market. The index is unmanaged and cannot be invested into directly.
2 Diversification does not guarantee profit or protect against loss. Investing involves risk, including possible loss of principal.
