In periods of market uncertainty, an influx of self-proclaimed experts and pundits often share their forecasts about global events and their potential impact on the financial markets. These views are predominantly amplified through various financial media channels, offering guidance on how to maneuver your portfolio. These general predictions and recommendations, however, are not custom-tailored to anyone's specific financial situation. They fail to consider critical factors such as personal risk tolerance, tax status, individual goals, or your intended use for your money. In essence, these recommendations are primarily designed for traders, not investors. So, what does this mean for the average investor?
Investors have two key strategies when navigating through a market downturn: guessing or managing.
The term "Guess" is used intentionally, not to induce bias, but as a reminder that predicting market movements is a gamble at best. The financial markets have a long history of behaving in unpredictable, often counterintuitive ways, the logic of which only becomes apparent in hindsight. Some portfolio managers stake their worth on making these market predictions or 'guesses', then adjusting portfolios based on their forecasts. But let's be clear: this approach is inherently based on conjecture, no matter how much data or charts are presented as evidence of previous accuracy.
This method of portfolio management bears tangible costs like transaction fees and taxes, which inevitably chip away at the portfolio's overall performance. Furthermore, it forces a state of perpetual motion, as the value of portfolio managers is tied to their predictions, prompting an endless cycle of guesses.
But if this guesswork method was truly effective, wouldn't we all be following the Twitter feed of some market savant, aligning our actions with theirs? The fact that we're not demonstrates that such a consistently accurate predictor simply doesn't exist.
This leads us to a more practical approach that most of us should employ: managing our finances through market events. Rather than trying to foresee what's next, we accept two fundamental realities. One, markets rise AND fall. Two, given sufficient time, markets recover.
There are three effective ways to manage through downturns:
1. Rebalance: Adjusting your portfolio after market shifts can bring your risk level back to your target. If stocks decline significantly, you can shift a portion of your portfolio from bonds to stocks, thereby aligning your risk level with your original target. This method is simple, yet effective, as it compels us to act contrary to our instincts—we buy when prices drop rather than sell.
2. Harvest Tax Losses: Implementing strategic changes that push temporary losses onto your tax return can offset future gains generated by the portfolio. This results in genuine tax savings that are measurable and contribute to overall returns.
3. Invest: If you have excess cash and the courage to act, consider investing during a downturn. Buying stocks when they're low is challenging but has proven profitable over the long run. You don't need to time the market perfectly, but rejoice in knowing you've secured a lower price than the previous week or month.
Investing is based on the fundamental belief that markets, although unpredictable in the short term, will always rise over time. Noticeably, none of these portfolio management techniques rely on guessing the near-term direction or precise timing—only on attentive portfolio management and capitalizing on opportunities during a downturn.
As an unwavering rule, I firmly believe in not taking chances with client money.
**Disclaimer**: Asset allocation doesn't guarantee better performance and can't eliminate the risk of investment losses.
Remember, the aim is to manage your portfolio smartly, not predict the market whims.