This may be the last weekend we can say, “Happy New Year!” to friends. And a fairly happy new year it has been for the markets… with a few bumps here and there. The “bump” was a mini-cavernous plunge for shares of Nvidia shares, down 15% in one day without a rebound. Both the S&P 500 and Nasdaq 100 (tech focused index) promptly rebounded.
However, there may have been a few investors, especially those newer to the markets or those less patient among us, who need a “gut check” when markets get rocky. Here are a handful of questions investors can ask themselves, in order to stay put with current investments in down and seriously down markets – providing a plan is already in place:
- Cash level – Is my level of cash sufficient for my CURRENT (i.e. 2-3 months) bills?
- Do I still have my job? (meaning an income)
- Do I have an Emergency Fund intact? (i.e. 6-12 months of emergency savings in case of a job loss or other emergency)
- Do I have a PLAN in place? For help with what this means, please call me.
- Is my “asset allocation” still roughly intact? (meaning a long-term “set” proportion of Stocks vs. Bonds vs. Cash)
- Am I scared? If YES – which is perfectly reasonable – what are you scared of?
- Why am I investing in the first place? Is it for later in life? For retirement, which could or could not be around the corner? Kids’ college? To live on current dividends and/or interest from investments?
If an investor can answer most or all of these questions with positive, rational answers, then there is little to no reason to sell investments in a rocky or down market.
If an investor admits being scared of down markets, identify what is creating fear:
- Is it “losing everything”? With history as a guide, the “losing everything” scenario is extremely unlikely—unless a person has an outsize % of monies invested in a very narrow list of securities or has most monies tied up in a business or real estate (as in, not diversified).
- Is it fear of not being able to achieve retirement?? This scenario is more a matter of SPENDING vs. how much a stock or bond portfolio has gone down.
- Is it running out of cash?? Pick a “peace of mind” amount of cash to have on hand. Yes, cash can be “King” in rocky markets. Talk with your financial advisor about an intelligent amount of cash to have on hand.
Finally, a form of a “P.S.”: When stock or bond markets get rocky – or go down – a smart investor has a plan established with cash on the sidelines to protect spending and lifestyle needs – and to be able to pay taxes. Another way of looking at the situation is that liquidity is affected: often there is less liquidity available in down markets. A smart plan does not require investments to be sold when markets are down and values are lower.
Non-public equities and private debt (also referred to as private credit) are forms of non-traditional or “alternative” investments, or simply “Alts”. Typically non-public investments, including crypto, have less liquidity but are part of long-term financial plans. This topic will be part of a future TGIF 2 Minutes.
This material has been prepared for informational purposes only and is not intended to provide, and should not be relied upon for, tax, legal or accounting advice.