It’s rare when bond markets and equity markets decline precipitously at the same time, but the first four and a half months of 2022 have taken investors for quite the ride. Thanks to record-high inflation, rising interest rates, and geopolitical conflicts, many investors may feel uncertain about where they stand with their portfolio and may ask: What are my options?
Before you decide on how to handle your portfolio, consider these three possibilities:
1. Move to Cash
For many people, moving to cash may sound appealing. However, moving to cash may decrease your expected return going forward. Additionally, reacting emotionally and moving to the sidelines could be detrimental to portfolio performance as you may miss out on some of the best-performing days in the market. See the exhibit below for an example of the cost of missing the best-performing days of the S&P 500 Index.
2. Do Nothing and Stay Put
Investors should be willing to accept increased uncertainty to enjoy the benefits of higher-than-expected returns. A crucial part of a good long-term investment experience is being able to stick with your investment philosophy, even during tough times. A well-thought-out, transparent investment approach can help better prepare you to face uncertainty and may improve your ability to stick with your plan, tune out the noise, and potentially capture the long-term returns the capital markets have historically provided.
3. Rebalance and Tax Loss Harvest
Resource Consulting Group (RCG) may proactively do a couple of things during a downturn: rebalance your portfolio and perform tax loss harvesting. One element of putting together an investment plan is setting a target asset allocation. During periods of market volatility, we may rebalance your portfolio to ensure its risk and return characteristics stay consistent with your plan. During periods of relative equity underperformance, we may sell fixed income and buy equities to maintain your target asset allocation. This disciplined approach has added value through many downturns.
RCG may also manage tax liabilities through loss harvesting. We may choose to sell some investments to realize capital losses that we can use to offset current or future capital gains. An effective method of tax loss harvesting involves selling one fund to capture a tax loss and immediately buying a similar fund so that we’re not out of the market at any point in time.
While the unpredictability of the market can be unsettling, it’s important to keep your eye on your long-term investment plan.
Bear in mind this quote from Benjamin Graham, author of “The Intelligent Investor,” a book Warren Buffett said, “is by far the best book on investing ever written.”
Graham perfectly articulated, “In my nearly 50 years of experience in Wall Street, I’ve found that I know less and less about what the stock market is going to do, but I know more and more about what investors ought to do.”
Remember that RCG is here to help guide you during times of uncertainty. If you have questions about your investment strategy or there have been changes to your personal situation, please contact your RCG advisor.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.
For illustrative purposes. The missed best day(s) examples assume that the hypothetical portfolio fully divested its holdings at the end of the day before the missed best day(s), held cash for the missed best day(s), and reinvested the entire portfolio in the S&P 500 Index at the end of the missed best day(s). Annualized returns for the missed best day(s) were calculated by substituting actual returns for the missed best day(s) with zero. S&P data© 2021 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.