How To Invest Your Money In Turbulent Markets

Contributed by: Jaclyn Jackson, CAP®

Navigating daily market fluctuations through COVID-19 has been challenging. With every newsfeed from Washington or new economic data numbers, markets react. So what do we make of this as investors? Well, it truly depends on your circumstance. For individuals who have a long investment horizon and stable finances, there may be an opportunity to take advantage of market inefficiencies.

For individuals who have experienced (or anticipate) financial changes, it may be time to reevaluate your investment approach. Here are a few ideas to discuss with your advisor when considering investment strategies during the coronavirus pandemic.

Strategies for Long-Term Investors

For long-term investors, volatile markets should not discourage commitment to your investment plan. Staying invested, reestablishing your asset allocation, gradually investing, and generating tax opportunities are still valuable to progressing your investment aims. Think about the following strategies:

1. Rebalance - Rebalancing is a systematic way of adapting the commonly suggested investment advice, “buy low and sell high”. It disciplines investors to trim well-performing investments and buy investments that have the potential to gain profits. In our current environment, that looks like trimming from bond positions and investing in equities for many people. Importantly, rebalancing helps investors maintain their established asset allocation; someone’s predetermined investment allocation suited to meet their investment objectives. In other words, rebalancing helps investors maintain the risk/return profile meant to enhance their probability of meeting long-term goals.

2. Dollar-Cost Average - A gingerly alternative to rebalancing is dollar-cost averaging. Investors who use this strategy identify underexposed asset classes and invest a set amount of money into those assets at a set time (i.e. monthly) over a set period (i.e. 1 year). This method helps investors buy more shares of something when it is inexpensive and fewer shares of something when it is expensive. Buying at a premium when the market is up is stabilized by taking advantage of prices when the market is down. Therefore, the average cost paid per share of your investment is cheaper than just paying the premium prices. Having a dollar-cost averaging strategy in place now, while markets have dipped, helps you buy more shares of investments while they cost less.

3. Tax Loss Harvest - Selling all or part of a position in your taxable account when it is worth less than what you initially paid for it creates a realized capital loss. Losses can offset capital gains and other income in the year you realize it. If realized losses exceed realized gains during that year, realized losses can be carried forward (into future years). Harvesting losses could help investors replace legacy positions, diversify away from concentrated positions, or stow away losses for more profitable times.

4. Do Nothing - The key here is to stay invested. The challenge with fleeing investment markets when they are down is that it is incredibly hard to time reinvesting when they will go back up. Missing upside days may inhibit full recovery of losses. According to research developed by Calamos Investments, missing the 20 best days of the S&P 500 over 20 years (1/1/99 – 12/31/19) reduced investment returns by two-thirds. Time, not market timing, supports you in meeting your investment goals.

Strategies Amid Financial Hardships

Many people’s employment and financial situations have changed. Understandably, some have to review their ability to invest. If you are concerned about losing your job or potential health issues, it is time to revisit your savings. Could your rainy day resources cover 6-8 months of financial needs? If not, you will likely need to build up savings. For those who are experiencing financial challenges, consider the following strategies:

1. Add to emergency funds by lowering or pausing retirement account contributions. Luckily, you do not have to liquidate part of your retirement account with this strategy. Staying invested gives your portfolio a chance to benefit from long-term performance. If your employer matches retirement account contributions, continue to invest up to that amount, then add to savings with the balance of your normal participation amount. Once savings needs are met, resume full investment participation.

2. Rebalance your portfolio to provide liquidity. As noted above, rebalancing takes earnings off the table from investments that have performed well. However, instead of reallocating to other investments, use proceeds to increase your rainy day savings. This method prevents you from selling off positions that are at a loss.

Jaclyn Jackson, CAP® is a Portfolio Administrator at Center for Financial Planning, Inc.® She manages client portfolios and performs investment research.

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Please note, the options noted above are not for everyone. Consult your advisor to determine which options are appropriate for you. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

The Bucket Strategy

If you are in retirement (or close to retirement), you are most certainly concerned about the recent market volatility.  You are likely wondering how your investment portfolio might be structured to provide the income you need without putting the portfolio in a vulnerable position. 

 The Bucket Strategy (not to be confused with the “Bucket List”) is another way to describe a cash distribution method to provide you with income from your nest egg during any kind of market cycle. 

Consider that we each have 4 buckets and that every investment within your portfolio fits into one of these buckets.  The idea is that this strategy can provide cash flow, even if equity markets drop or stay low for extended periods of time. 

Bucket 1:  The first bucket is labeled 1-year or less.  This is the cash and short term securities that mature in less than one year to support the cash flow needs for the client for the first 12 months. 

Bucket 2:  The second bucket would start generating cash flow in the 13 month – 36^th month or years 2 and 3.  This contains short-term bonds and fixed income type securities that have a small amount of volatility and are primarily for preservation of capital.  The holdings in this bucket do pass on interest income that flows into the first bucket. 

Bucket 3:  The third bucket is structured to generate cash flow needs in years 4 and 5 and primarily contains strategic income and higher yielding bonds (lower quality, longer maturing and international type bonds).  However, they do pass on interest income that flows into the first bucket. 

Bucket 4:  The fourth bucket is made up of equities (stock investments) and other assets that have higher volatility like gold, real estate, commodities etc.  Many of these assets produce dividends to help replenish the first bucket, if the dividends are set to pay in cash vs. reinvest. 

The bucket strategy is designed to provide enough cash flow to get through roughly a 6- or 7-year period without needing to liquidate the stock portion of the portfolio.  This should provide you with the confidence and consistent income needed to enjoy your retirement and work on your bucket list! 

Talk to your financial planner to see how the bucket strategy might work for you.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James. Investments mentioned may not be suitable for all investors. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. High-yield (below investment grade) bonds are not suitable for all investors. When appropriate, these bonds should only comprise a modest portion of your portfolio. Please note that international investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated. Be advised that investments in real estate and in REITs have various risks, including possible lack of liquidity and devaluation based on adverse economic and regulatory changes. Commodities and currencies investing are generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. Dividends are not guaranteed and must be authorized by the company’s board of directors. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. Be sure to contact a qualified professional regarding your particular situation before making any investment decision.

History Lessons in the Fourth Quarter

Many investors were ready to say goodbye to the 2011’s third quarter with extreme volatility demanding attention and negative returns for many types of investments.  Indeed, when you review the chart below, the fate of most investors was grim from June 30th to September 30, 2011.

 *Source: JPMorgan Asset Managment

News from the Europe has been dismal.  Questions linger about the growth prospects for US and global markets.  Whether we’re experiencing a new or double-dip recession or just very slow growth, the economic picture does not feel rosy.  

While emphasizing that past performance does not predict future returns, the fourth quarter has historically been the best return environment for stocks.  While the third quarter has been the worst performing quarter for the S&P 500 on average (going back to 1928), the fourth quarter has been the best.  Interestingly, this trend has been even more distinct over the last 20 years. 

 *Source: Bespoke Investment Group

Many people will be watching third quarter earnings as they are announced as an important gauge of trends in our economy.  Greece and the Eurozone’s issues are far from resolved.  Don’t get too distracted by these headlines to lose the lessons of the history of returns.

[1] All indexes are unmanaged.  MSCI EME represents emerging market equities.  Russell 2000 is an index of 2,000 smaller U.S. companies.  MSCI EAFE is an index of large companies in developed countries outside the US.  REITS is composed of the NAREIT Equity REIT index composed of US Real Estate Investment Trust equities.  The S&P 500 is an index of 500 widely held stocks that’s generally considered representative of the U.S. stock market.  DJ UBS Cmdty is compiled by Dow Jones and represents the price of a basket of commodities.  Market Neutral is CS/Tremont Equity Market Neutral index with long and short exposure to stocks.  Barclay’s Agg is an index of US bonds representing a variety of investment grade bond assets and weighted by outstanding composition.  Inclusion of these indexes is for illustrative purposes only.  Individuals cannot invest directly in any index, and individual results will vary.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  Any opinions are those of Melissa Joy and not necessarily those of RJFS or Raymond James.  Expressions of opinion are as of October 14, 2011 and are subject to change without notice.

Gold Sparkles, But For How Long?

There has been much interest in the media over the past year regarding gold as the bullion price per ounce has gained nearly 30% this year.  As a result, investor interest in gold has increased as a diversifier to portfolios because many view this as a "safe haven." Gold is a “fear” asset class, and uncertainty in almost every risk asset class has intensified gold’s price increase.  Much of the gains this year can be attributed to growing uncertainty surrounding U.S. Treasuries and European Sovereign debt.  Investor demand has also increased because the asset class has become more accessible through new products such as ETF’s (Exchange Traded Funds). 

In the past gold has shown itself to be a good hedging instrument against inflation and a weakening dollar and tends to have almost no correlation to stock and bonds.  Other investments also serve as a potential hedge against inflation and a weakening US dollar such as TIPS (Treasury Inflation-Protected Security), commodities, and foreign currency bond funds.  Naturally, gold has been part of our research efforts on this front.  The run up in the price of gold over the last few years is a concern to us (see chart below). 

The cost to extract gold from the ground is roughly $740 per ounce.  With gold trading over $1,882 per ounce as of 9/2/11 that is a $1142 premium.  This could indicate a supply and demand imbalance and perhaps, panic or speculative buying.  Gold’s price has often been driven more by speculation or its role as investment portfolio “insurance” than by fundamentals.  As a result, gold is subject to market risk. 

Sources:

No-Load Fund Analyst July 2009

Geoff Considine Ph.D., Advisor Perspectives, Sept. 2010

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and are not necessarily those of RJFS or Raymond James.  Investments mentioned may not be suitable for all investors.  Past performance may not be indicative of future results.  Gold is subject to the special risks associated with investing in precious metals, including but not limited to:  price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated.

Investing Against Human Nature

“The loser is the trend-chasing, comfort-seeking investor. The market doesn’t reward comfort. It rewards discomfort.”  Rob Arnott

The above quote brings to mind a book I read recently, The Little Book of Behavioral Investing by James Montier. It attempts to describe in detail why we are our own worst enemies in investing. 

Human evolution has dictated much of our decision making process and emotions.  In modern society we don’t have to play the predator/prey game of survival on a daily basis.  Yet much of our instincts are based on this survivalist mentality developed hundreds even thousands of years ago. 

Contrary to when it was safer to go with the herd, a safety in numbers mentality can be detrimental when applied to modern investing.  Enter the discomfort.  Going against the grain when it comes to investing can be very scary, for example funding your Investment accounts when you’d rather throw a brick through your financial advisor’s window; however, it is generally where the best investment returns come from. 

Having a sound investment process in place to identify opportunities and maybe more importantly to avoid “knee-jerk” reactions is critical in investing.    Process, in an uncertain world, is one of the few things we can control.  Just as important as the process, is the time that must also be taken to reflect on your process when you are most successful and not necessarily when you are making the most mistakes. 

Investing involves risk and you may incur a profit or loss regardless of strategy selected.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.