Time to take control

Informed, diversified investors can weather market storms

Posted on May 29, 2020 :: Wealth Management
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Posted by , Insight on Business Staff Writer

It’s the one piece of mail no one wanted to open in April — their 401(k) or other investment statements from the first quarter of the year. The COVID-19 pandemic and all of the uncertainty around it turned the stock market into “a roller coaster ride in March,” says Rafia Hasan, chief investment officer with Wipfli Financial.

Since then, the market has had its ups and downs, but they are more in line with what investors expect, and overall stock prices are rising again. “Everyone didn’t even want to see what happened on their statements,” says Rob Riedl, president and director of Endowment Wealth Management in Appleton. “But you need to open it and know your options.”

And the investment options are plentiful, whether it’s equity markets, bond markets and certificates of deposit or something more tangible like gold. The key, Riedl says, is to know your risk tolerance and review investments to see if they match how much risk you are willing to take.

Hasan, who spoke as part of a St. Norbert College webinar looking at the economic impact of COVID-19, says markets reward disciplined investors. She urges people to refrain from selling immediately when the market begins to head downward.

“Everyone asks, ‘How long will this poor market last?’ No one knows the answer, but I can say that data shows bull markets last longer (than bear markets) and have greater returns, which is why I tell investors to hold on right now,” she says. “I don’t have a crystal ball, but the market will get better.”

Making investment decisions based on emotions is not a wise move, says Huong Tran, a financial adviser with Prosperity Partners, located at Prospera Credit Union. “When the market drops, asking ‘Should I sell?’ is a knee-jerk reaction. If your investment strategies made sense before the downturn, they will still make sense during the downturn,” she says.

Tran also advises clients that if they sell while the market is down, they lock in their losses. If investors stay put as the market improves, they can erase some of the losses. “It’s hard to know when to take money out of the market and even harder to know when to put it back in,” she says.

Wipfli’s Hasan says investors need to remember the stock market is a leading economic indicator, so its value will increase — like it was doing in May — at a time when the overall economic picture is bleak. “The market isn’t the same as the economy — you need to always remember that,” she says.

Smart money moves

The key to weathering a decline in the market is having a solid financial plan that takes note of age, retirement goals and risk tolerance.

Everyone has different risk tolerances, and investors can fill out questionnaires to help their financial adviser create a balanced portfolio, Riedl says. He also points to a common misconception — the closer you get to retirement, the more conservative your portfolio needs to be.

“Most people are working longer and living longer. If they are working longer, they have more time to add to their investment fund,” Riedl says. “Some people are living 20 or 30 years after they stopped working. If you are too conservative, you’ll run out of money. Today, I tell clients they need a portfolio with a 50/50 split between stocks and bonds at age 75, not age 65.”

One worry some investors have is that inflation will eat into their retirement savings, he continues. Health care costs, for example, are normally a lot more at age 75 versus 55.

Dollar-cost averaging is the best way to build wealth, Riedl says. In dollar-cost averaging, investors place a fixed amount of money into an investment program at regular intervals. The strategy is designed to help the investor buy more shares when prices are down and fewer when prices are up, creating an average price per share and theoretically reducing the overall investment cost. If that sounds a lot like a 401(k), you’re right.

Riedl says the 401(k) is the most common investment vehicle people use to save for retirement, but they often set the allocation levels — for example 70 percent in stocks, 30 percent percent in bonds — and forget about it.

“401(k)s are a critical asset. You need to rebalance your portfolio annually,” he says. “Pay attention to your accounts. Check on them quarterly to see how they are doing and what you may need to do to adjust.”

Riedl says investors should not be afraid to take charge of their 401(k) accounts. “They are a complicated asset, and if you don’t understand it or what’s happening, then find yourself a fee-only financial adviser,” he says. “It’s better to do something rather than nothing.”

While Tran recommends investors meet with their adviser every six months or so, she adds some 401(k)s have quarterly rebalance features they might want to select. “It’s important to rebalance your account regularly as the market changes, so you can bring your investment mix back to your target allocation. If you don’t have an investment strategy in place and don’t know what your target allocation should be, it’s time to find a financial adviser.”

Tran acknowledges some people do not believe they need an adviser because “all they have” is a 401(k). “That is still a huge asset and one you need to pay attention to,” she says.

One way to drive significant growth is placing all new money going into a 401(k) — whether it’s your own dollars or funds from your employer — into stocks, while diversifying the remainder of the account according to your risk tolerance.

“This option helps protect your (savings) bucket but also provides a way to see significant growth without taking on too much risk,” Tran says.

Diversification, whether it’s stocks, bonds or another investment option, is also an essential part of making sure your funds can handle market volatility, Riedl says.

Tran says the drop in the market during this pandemic may provide an opportunity for some people to grow their investments. If someone is still employed and has seen their expenses drop dramatically because sheltering-in-place has caused canceled plans such as trips and vacations, it might be a good time to take that extra money and put it into an investment vehicle, she says. “When we’re in a crisis, we feel like we have to do something — that is something you can do that will help later on,” she says.