What do I do now? At the end of the day, investors really have only three choices to make when managing an investment portfolio — buy, hold, or sell, notes Richard Moroney, editor of Dow Theory Forecasts.
You should be constantly mulling those three decisions regardless of market conditions — Buy, Hold and Sell. Yet too often investors flee the decision-making process during market corrections or crashes. Or they go to extremes and act out of panic.
We understand that the recent market action feels like it demands a response. But the response that usually accompanies such market downdrafts is panic.
I’ve been in the investment business for nearly 40 years, and I can’t recall a single instance when panic investing paid dividends in a long-term investment strategy. In fact, panic selling tends to happen at precisely the worst time and can weigh heavily on long-term returns.
So, what should investors be doing now? Basically, they should be doing what they always should be doing as prudent investors:
Buy —
Market crashes restore values and create opportunities for upgrading portfolios to take advantage of the inevitable recovery. Each of us has a finite amount of money to invest, so it behooves us to remain invested in our best ideas at all times.
Market declines will broaden the pool of attractive values. If you don’t buy during market declines, you neuter one of your most powerful investing weapons — upgrading your portfolio.
What should investors be buying right now? We can make a case that you need broad market exposure to a recovery, which points to putting some dollars into an index fund, such as the Vanguard S&P 500 (VOO) exchange traded fund.
On the individual-stock side, I like a barbell approach. On one end of the barbell, add high-quality growth stocks that have become much cheaper. Stocks that fit this classification are Alphabet (GOOGL) and Akamai Technologies (AKAM).
At the other end of the barbell, tilt toward higher-yielding stocks, and perhaps some in out-of-favor sectors. Stocks that fit this category include Bristol-Myers Squibb (BMY), Comcast (CMCSA), and J.P. Morgan Chase (JPM). Alphabet, Akamai, Bristol-Myers Squibb, Comcast, and J.P. Morgan Chase are all Focus List stocks.
Sell —
There’s a difference between panic selling, or haphazardly dumping stocks to numb the pain during market declines, and strategic selling, which considers proper asset allocation in conjunction with portfolio risk.
Risk factors include overweighting a sector or stock, or carrying too much margin debt. Plus, you might need to raise funds to buy more attractive stocks. Again, investors should always monitor their asset allocation and risk levels, not just during market crashes.
Portfolio pruning is necessary during market crashes, if only to raise funds that can be deployed in more attractive stocks. How do you know what to prune? Start with stocks that you own yet can’t recall why you bought them, or that no longer satisfy the reasons you bought.
If you can’t justify owning them . . . and you don’t believe they remain among your best ideas . . . sell them, and don’t worry about taking a loss. Your investment dollars are too valuable to tie up in zombie stocks.
Hold —
It is probably counterproductive to focus on whether the market is “bearish” when it comes to a long-term strategy, especially when investing in IRAs and 401(k) investment plans. Indeed, bear markets are usually measured in months, while investing for retirement is measured in years, if not decades.
Thus, it is usually a mistake to drive a retirement account based on what may happen in the coming weeks or months. In fact, the right strategy might be to do nothing during market declines, especially in retirement-focused portfolios.
Indeed, trying to trade in and out of retirement accounts to avoid declines is very difficult to do successfully over time.
For long-term investors, especially those in IRAs and 401(k) plans, the biggest risk of investing is not being in the market when it declines, but being out of the market when it goes up. And your chances of missing big upward moves and new bull markets increase with increased trading activity.
If you have what is an appropriate long-term investment allocation (stocks versus bonds versus cash), you may not need to adjust. And if you own stocks you believe will rebound well during the next updraft, holding those stocks makes sense.
