Is It Time to Reassess Your Investments?

2/4/2019 - By Chris Stennett, CFP®

U.S. stock markets hit their most recent peak in August 2018 and slowly declined through October, with the months of November and December experiencing frequent price swings. December alone had multiple days of sharp declines along with dramatic upward swings. 

Investing in the stock market always carries the risk that stock prices can go down. I suspect that if you are currently invested, you’ve done so for a specific reason. Maybe it’s for your future retirement, financing a child’s education, or simply because you want to grow your wealth. So, should the recent volatility cause you to reassess your investment portfolio? To answer that question, you need to understand two key concepts: risk and time horizon.

In the Absence of Risk, There Would Be No Return

In all facets of investing an investor must be willing to take on some form of risk. Investors who put all their money in cash products run the risk that their earned interest won’t keep up with the cost of goods and services.  Investors who only use U.S. Treasury bonds have interest rate risk and inflation risk. Investors who only use corporate bonds have the added risk of the company failing or the bond being called. Even real estate investing carries risk (recall the market crash of 2008). There is no one asset we can invest in that provides a completely risk-free return.

Imagine what it would be like to play the lottery when everyone knows next week’s winning numbers. Every ticket would be a winning ticket and the resulting jackpot would be distributed to everyone who bought a ticket. The payout would be very low because the risk of not winning was eliminated. In all investment vehicles, risk is the mechanism that drives return. For stocks, risk is factored into the stock price. Stock prices change for a host of reasons but, fundamentally, it is because new information becomes known that either makes a stock (or stock market) more or less attractive to investors.  

Why and When Matter

Alone, the fact that markets go up and down shouldn’t cause you to reassess your investments. What should however, is what the markets are doing relative to when you need the funds you’ve invested. As mentioned, you’re investing for a reason and eventually that reason is going to compel you to action (child is graduating high school, retirement is beginning, etc.) This is represented in your time horizon. An investor’s time horizon is expressed in two intervals. The initial interval is the amount of time between the first-day funds are invested and when you will take the first planned withdrawal. The second interval is the amount of time from the first planned withdrawal to the last planned withdrawal. 

A more practical understanding of time horizon: My wife and I put money into a 529 plan when my daughter was born. We will continue to put money in every year until she graduates high school. If all goes well, she will attend and graduate from college. Our first interval is the period between initially funding the 529 and her making her first college tuition payment in approximately 18 years. The second interval is the time between making her first tuition payment and her last tuition payment (graduation), approximately 4 years. 

So, When Should You Reassess? 

As the date of your first planned withdrawal approaches, you’ll want to pay close attention to your investment portfolio’s risk. A portfolio consisting predominantly of stocks is going to be more sensitive to market volatility.  Your investment approach should begin to shift away from aggressive growth towards less volatile investments as you near your first interval. That’s because you’ll need to take money from this account and in order to do that, some investments will need to be liquidated. 

Does that mean that everything in your portfolio should be entirely low risk? Well, that depends on your time horizon’s second interval. If you have a short second interval (7 years or less) then you may be more comfortable with an entirely low-risk portfolio. Think back to my daughter’s 529. The second interval is only 4 years. To me, the benefits of taking less risk to ensure I can pay her tuition, far outweigh the potential returns I could see if I stayed in stocks. 

That probably won’t be the case if you have a longer second interval, like retirement. Your initial withdrawal (first interval) might occur when you retire at 65 and last until your 90 or older. That’s more than 25 years of withdrawals. A longer second interval provides more time to recover potential losses from the market and may justify holding more stocks in your portfolio as a result.

Have a Plan or Get Some Help 

If you understand the risks of investing and can clearly define your time horizon, then you have enough information to know whether it’s time to reassess. Changing your investment strategy should be process driven, not event-driven. Don’t let your emotions be driven by the headlines of financial news. Changes in the prices of stocks are exceptionally common and unpredictable. If you’re not confident in your investment strategy or feel it warrants a second look, contact us. We’ll show you how we help clients navigate these challenges and others.

About the Author | Chris Stennett, CFP®
Chris is a financial advisor and Certified Financial Planner™ practitioner for Saltmarsh Financial Advisors, LLC, an affiliate of Saltmarsh, Cleaveland & Gund. He serves individuals and organizations as a comprehensive financial planner and coordinator of investment activities. His areas of expertise include investment management, income planning, tax and estate planning, incapacity protection, and liability management. Connect with Chris on LinkedIn.

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