Even if stock market is crazy, you don’t have to be

By Sheryl Rowling

SAN DIEGO — The stock market is going crazy. When it bumps up, we’re all happy. When it drops, especially more than one day in a row, we panic. We can’t control the market; all we can do is react – or not. Rather than act rashly, let’s take a look of what you should or shouldn’t do when there is a market downturn.

Do:

Trust in the long term. If the market was always going up, there would be no risk – and you’d be getting bank account interest rates. The reason you will be rewarded in the long run is because you’re willing to accept volatility in the short run. Historically, two-thirds of the time markets will be up and one-third of the time they’ll be down. As much as the media “Chicken Littles” broadcast that the sky is falling, periodic downturns are normal.

Don’t:

Sell out. Having a diversified asset allocation strategy will help you achieve a solid long term investment return. Diversification means that, in general, your portfolio will not go up as much as the S&P in a bull market and it won’t decline as much as the S&P in a bear market. In other words, your portfolio will tend to move in the same direction as the market, but the swings will be less extreme. If you try to outsmart the market by guessing when to get out and when to get back in, the odds overwhelmingly say you will guess wrong. Don’t lock in your losses by selling and don’t try to beat the market. You’ll only set yourself back.

Do:

Maintain an asset allocation. An asset allocation means that you will diversify your portfolio by holding fixed percentages of stocks, bonds and other investments. As the market changes, your percentages will change. Maintaining your strategy will require that you periodically rebalance your portfolio – selling what is overweighted and buying what is underweighted. In other words, in downturns, you’re taking advantage of bargains. Think of yourself in a grocery store. When grapes aren’t in season and prices are high, you don’t buy grapes. When there’s a sale on canned tuna, you stock up on tuna. The average investor’s emotional reaction to the stock market is just the opposite. They do exactly opposite of what makes sense – investing more when the market is up (buying the expensive grapes) and bailing out when the market is down (missing the opportunity to buy tuna at a discount). In fact, studies have been done comparing what investors do on their own vs. how they do with a qualified investment advisor. According to Dalbar, average investors consistently underperform – often not even matching inflation – because they jump around. Therefore, consider using a Registered Investment Advisor.

Don’t:

Make yourself crazy. The TV news and “experts” in the media are there to create ratings. If every report said “stay the course,” how would that impact ratings? Sensationalism sells. So, what you read and hear will always be extreme – aimed at causing either euphoria or panic. Your best plan of action is to ignore the talking heads. Also, don’t look at your portfolio balance every day. There’s no point!

Do:

Harvest tax losses. When the market drops, you have an opportunity to recognize tax losses, while still keeping your portfolio fully invested. Sell what generates a tax loss and immediately buy something similar. (Make sure you don’t buy back exactly what you sold within 30 days or the IRS will disallow the tax loss.) Building up a pool of tax benefits will drop your tax bill this year and maybe even help next year.

Downturns aren’t fun, but they are normal. Stay the course!

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Rowling  is a certified public accountant, personal finance specialist, and principal of Rowling & Associates. She may be contacted via sheryl.rowling@sdjewishworld.com.  Comments intended for publication in the space below must be accompanied by the letter writer’s first and last name and by his/ her city and state of residence (city and country for those outside the U.S.)