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Elections, Pandemics, and Recessions: Investing in Volatile Times

March 4, 2020

We live in an unpredictable world, especially for investors. In the last few years alone, we’ve seen some unprecedented short-term rises and falls in the value of stocks, federal interest rates, and commodities markets across the world. It can be difficult to decide where your money should go and what you should do with it.

When you’re assessing your asset allocation, here are a few things to keep in mind.

Should You Worry About a Market Downturn?

Yes and no. The truth is that markets rise and fall — they always have, and they always will. The next major downturn is a matter of when, not if. We’ll be the first to admit that it’s nerve-wracking to watch the value of all your money rise and fall because of some external factor, but that fear is born of a perspective that’s too short-term.

The fact is that most people with significant holdings in the stock market aren’t day traders — they want their investments to last years or decades, not days or months. Yes, a significant downturn might see the value of your portfolio drop by more than 20 percent in a year, but those drops rarely last more than a few years. If you’re not planning on cashing in your stocks for another decade or two, those dips shouldn’t concern you.

Instead, look at downturns as an opportunity. You have no idea what the market will look like in 15 or 20 years — all you know is that you can buy index funds for 9 percent less than you would have paid last month. If that’s a good price, go for it!

The Coronavirus Scare

At the time of writing this article, the world is still firmly in the grip of a global health crisis. The virus known as COVID-19, which originated in China, has infected tens of thousands of people and killed thousands, and there’s no real solution in sight.

The effect that this illness has had on global markets is enormous. Markets in Shanghai, Japan, and Hong Kong have taken a serious dive in recent weeks, and the US stock market has followed, responding to factory shutdowns, interrupted supply lines, medical shortages, and millions of quarantined people.

The good news is that we’ve seen this before. The HIV/AIDS crisis of 1981, the SARS outbreak in 2003, the swine flu outbreak in 2009, Zika in 2016, and several others have had similar short-term effects on the global economy, but virtually all of these downturns reversed within six months. There’s no telling how long this particular dip will last, but there’s no need to panic just yet.

Tips for Staying the Course

Knowing rationally that the market will stabilize over a long enough time scale is one thing. Keeping yourself from worrying about it is another. Here are a few things that will help you stay confident that you’re on the right track during uncertain times.

Don’t Check In Every Day

Our connected, digital world is both a blessing and a curse. You can get apps for every bank and brokerage account you use, and you can refresh your account balance in real-time while you sip your coffee in the morning.

But that’s not necessarily a good thing. As we’ve mentioned, the key to investing in volatile times is to think long-term, and that’s hard to do when you’re wringing your hands over a 0.8-percent drop in your portfolio. Remember, it’s not a loss until you sell it. If you’re not planning on liquidating your brokerage accounts anytime soon, put the phone down and enjoy your breakfast.

Consider Dollar-Cost Averaging

Dollar-cost averaging is an investment strategy designed to take the guesswork (and the stress over guessing wrong) out of investing. Instead of watching stock prices like a hawk and trying to strike during a one-day or one-week low, designate an amount of money to be invested at a set interval — every two weeks or every month.

If you spend $5,000 on S&P 500 index funds on the first and fifteenth of every month, there will be times when that amount goes further than others. Over time, though, those purchases will average out to a much more predictable and stable aspect of your investment portfolio.

High-Dividend Stocks

One way to cushion the blow of falling stock prices is to invest in stocks that offer high dividends. That way, even if the price of the stock itself falls, the dividends are offsetting some of your short term losses. There’s a group of stocks called the Dividend Aristocrats that would be a good place to start.

The Importance of Diversification

There’s not an investor alive who hasn’t heard the phrase, “don’t put all your eggs in one basket.” But this advice is as true now as it’s ever been, so we think it’s worth reiterating. Don’t put all your money into tech stocks, but don’t put all of it into low-yield savings, either.

The idea is simple — different assets won’t gain or lose value at the same time or same rate — but that doesn’t mean you should pick a random mix of stocks. Instead, ask your financial advisors about stocks that tend to be negatively correlated such that when one falls in value, the other rises.

If you’re especially worried about the risk of the stock market, index funds are an excellent way to diversify without the hassle of spending all your time on research. Investing in a package of several dozen (or several hundred) stocks will generally result in much more stable returns than focusing on one or two stocks in particular.

The worst-case scenario is that the entire market will crash, as in the case of the 2008 financial crisis. In that case, the S&P 500 fell by more than half, dropping from 1,296 to 683 in a matter of seven months. It recovered quickly, however — by April of 2011, it had resumed its former value and now sits at more than 3,200. Investors with the presence of mind not to panic have seen substantial returns in the last ten years.

Talk to the Experts

At First Western Financial, we’re strong believers in investing with purpose. That means investing not just to increase the bottom line on your balance sheet, but in an effort to support the causes and goals that matter most to you.

Keep in mind that any investment carries a risk — investment and insurance products and services are not a deposit, are not FDIC-insured, are not insured by any federal government agency, are not guaranteed by the bank, and may go down in value.

To create a portfolio that’s diversified, deliberate, and specifically designed to help you meet your goals, talk to the experts. We have experts in every area of financial planning and investing, and we’ve seen uncertain investing times before. We can draw on years of expertise, working collaboratively to find things other advisors might miss and building a plan based on a holistic assessment of your goals.

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