Bloomberg's investment advice to ODs

July 05, 2020
On Friday Bloomberg posted an article about the return perils in 2020 for jittery stock owners who tried to get in and out of the market. You can read the whole thing here, but the bottom line is investors who held tight have ended up flat, but those who tried to time the ups and downs likely did much worse due to unpredictable swings—and much much worse if they missed the two days this year that the S&P 500 rallied 9%. NINE PERCENT. Most of market us would take that return for the whole year!

Flat obviously isn’t a very sexy return number, but it’s better than way down. Still, I regularly field questions about getting out of the market altogether given the future uncertainty. If this is a conversation that plays out in your head (or out loud), here are 3 strategies to cope with your desire to sell everything and try to get back in “when things are better” or "the market is down" (which by the way is a flawed strategy—very few people want to buy when the market is doing terribly AND there’s no guarantee the market will turn down anytime soon).

Tip #1: Write your timeline down. If you expect to retire in 10 years, ask yourself: do I think the my investment portfolio will recover from Covid-19 in the next 10 years? Conversely, the same question goes for doctors on a 2 year timeline to retirement, and if your answer is “no” and your retirement plan can support it, it may be time to adjust your portfolio to shield it more from market fluctuations.

Tip #2: Re-balance regularly. All portfolios should follow a percent-based guideline for investing in asset classes like large cap/small cap/ international stock. If the S&P has a great day and you’re skeptical, re-balance back to your original target allocation and take some of the gains off the table. How often is up to you, but I do this quarterly for clients with an occasional adjustment in between. Warning: doing this in taxable accounts can carry unexpected consequences like short term capital gains and wash sale rules.

Tip #3: Use yield to collect dry powder. Most portfolios produce an income stream. When you buy a stock, etf or mutual fund, you have the option to reinvest the dividend back into more shares of the stock OR take the dividend as cash. If cash is elected, over the course of a year, you'd probably build up 2-4% of your account's market value in cash. Letting that cash accumulate on the side to invest on a back market day is a happy medium approach to market timing—just don’t let it grow for years and years!

There are a lot of question marks about what your practice, life—and the stock market—will look like for the rest of 2020. No one can control any of these, but we can control how we handle things, like not timing the market!
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