As of closing on Monday (15th October 2018) the Dow Jones Industrial Average has fallen by 6.3% (approx.) from its October 3rd high, while the NASDAQ composite index has fallen 8.6% from its Aug. 31st peak near the 10% decline which the pundits usually define as a correction. The S&P 500 is 9½ years into the bull market, making it the longest ever. It has risen by 336% from its March 2009 lows. Everyone wants to know how much higher and longer can this bull run go. The CBOE VIX called (Volatility index) which is a gauge of fear in the market has risen above 20 which is its highest since April 2018.
When the markets fall, investors fear and try to get rid of their holdings to minimize further losses, but in reality, it doesn’t make sense in the long run if you follow a defined plan. When the market turns, volatile one must have an investment plan and should stick to it. People fret about rising volatility but are not prepared to handle it. Having a financial plan tailor-made to achieve your goals and objectives will help and also provide an opportunity to earn a better return.
Here are a few suggestions to stay in line with your long-term plan-
1) Selection – One must choose those asset classes to which the investor is comfortable with and suits your risk profile rather than putting money into something which is in trend.
2) Do not time the market- Investors usually try to time their entry and exit and often end up paying more on brokerage fees. Research studies conducted by Morningstar show that the returns that an investor gets by timing the entry and exit is worse than what he would have earned if he had simply bought and held the same funds. (Morningstar, Mind the Gap 2018)
3) Regular Investments- Investing in periodic intervals( weekly, monthly, yearly) will not create much impact on your portfolio performance. One can avoid the vulnerability caused due to market timing by investing regularly. If one invests through downturns, It would not guarantee a higher return but may actually benefit in the long run. When the market falls, the prices of investments fall, and these contributions allow you to buy more number of shares at the same amount.
4) Tax Benefit- If one wants to move money from traditional IRA or 401(k) to a Roth account, a downturn helps as it would create a lower tax bill.
5) Many people who are nearing retirement should take some profit during rallies to reduce your equities position. Investors should become prudent and wise, not reckless.
6) Do not manage everything by yourself- due to the market volatility the mix of equities, bonds, commodities, etc. would have changed, to which one may want to get back to the desired mix by rebalancing. It is a complex process to rebalance and you may want to consult an advisor before making any investment decision. A professionally managed account for longer-term goals like retirement provides a specific asset allocation mix based on the individual risk appetite.
In a nutshell
Instead of worrying about the rising turbulence and trying to time the market, it makes sense to adopt a disciplined approach by sticking to a sound investment plan and make use of the opportunities in the market.
That’s it from our end. Until next time!
Author: 1) Sunil Gangwani, Co-Founder, Plootus
2) Pranay Loya, Financial analyst, Plootus