Finance Q&A

Financial Q&A

Protecting your investment portfolio

QFinancial Q&A

Q. My investment and retirement portfolios are going down in value and my anxiety level is going up. Some of my colleagues are getting out of the stock market now before the market declines further, and other colleagues say to stay invested no matter the circumstances. I’m confused as to the best course of action. Please advise.

A. Before taking any action, you should examine your current goals and objectives. What goals are important to you? What are your savings goals? What is your time horizon? The objectives of your investment and retirement portfolios will help dictate the asset classes and security types needed to accomplish the goals of your plan.

So far, 2022 has been a difficult year for the financial markets. Losses have been significant and widespread, but a short-term portfolio decline should not be the reason to abandon your goals and objectives. Over time, history shows that stocks consistently provide higher returns than cash and bonds, and higher returns in stocks help accomplish investment goals faster. Unfortunately, positive stock market outcomes are not always the result, and long-term investors in stocks must accept the possibility of greater risk (market swings) for the possibility of greater returns as the market’s price of admission.

The downside of selling during market declines to protect against future losses means you probably won’t be able to take advantage of future gains. Gains after significant declines are unpredictable and often come in bursts. While the appeal of market timing is obvious (improving portfolio returns by avoiding periods of poor performance), timing the market consistently is extremely difficult, and investors that wait for the right time to invest often find themselves missing out on the best performing days the market has to offer. A simple example of this can be found by looking at an investor that stayed fully invested in the S&P 500 stock index from the beginning of 1997 through June 2022. Over this period, the investor with an initial $1,000 investment would have been rewarded as the investment grew to $3,452. The investor who missed out on the best 40 performing days (during the same period) experienced a loss as their initial investment of $1,000 declined to $399.

My advice is to stay the course, but you must be aware of your investment timeline. Longer timelines dictate a greater ability to tolerate market swings of risker assets. Conversely, shorter timelines dictate the need for safety and protection of investment principal. Combining assets with less risk (cash and bonds) with riskier assets (stocks) helps to reduce overall portfolio volatility and establish the foundation of a diversified asset allocation strategy. I would also advise you to seek further guidance from a qualified financial professional to review your risk tolerance and portfolio composition for the appropriate allocation.

William B. Howard, Jr., ChFC, CFP

International Place II 6410 Poplar Ave., Suite 330 Memphis, TN 38119 901-761-5068 Fax: 901-761-2217 whoward@whcfa.com

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