When the stock market is roaring, you might feel pretty smart. But are you prepared for the volatility that we’ve seen recently, and which may well continue and intensify in 2019? Many investors, have lopsided investment portfolios – too much in certain stocks, funds or regions and not enough in others. Or they play the averages, investing mostly in index funds that rise and fall in lock step with the markets. And when the markets do fall, you’re more susceptible to acting on gut instinct and limited access to information.
Here are 5 things we do at Laird Norton Wealth Management that allow our clients to weather market downturns in a way that makes the most sense for them, in terms of risk, return, cash flow, tax-efficiency, and in context of their entire asset base, not just investments.
#1. Check Asset Allocation
What you invest in and in what proportion can make a big difference in your long-term return. Down markets actually test how well you’ve made those choices. More often than not, when you see abnormal fluctuations in your portfolio during choppy markets, then your portfolio might not be very well built, akin to a beach bungalow trying to make it through a hurricane. Can your portfolio weather the storm? It can if it is built around your specific needs in terms of risk, return, taxes and cash flow management.
#2. Maintain Perspective
If you want your investments to keep growing (after inflation and taxes), there is no way to totally avoid risk in the financial markets. Market declines are inevitable and they provide opportunities to buy low and potentially sell high. But they can also be scary. If you sell and lock in a large loss, you can forfeit years of wealth accumulation. Don’t let this be you.
One way we help clients gain perspective: modeling the impact of worst-case and likely scenarios on their portfolios, so they can see how the duration and extent of the downturn will affect near- and long-term goals.
#3. Rebalance as Needed
If your portfolio is customized to suit your finances and risk tolerance, it is then appropriately balancing stocks and fixed income, international vs. domestic, as well as perhaps some alternatives to bolster diversification. That balance is typically upset as markets rise and fall in value. Re-adjusting to long-term target allocations at least once a year means your investment plan is more likely to stay on course.
#4. Become Tax-Efficient
Tax-aware investing is a way to boost your total return without taking on additional risk. Tax-efficiency requires looking at your investments as a whole and implementing a variety of strategies, including using tax-advantaged accounts to invest in high-tax assets; using losses to offset future gains; using tax-exempt and tax-advantaged accounts to invest as warranted; and investing with asset managers who seek to minimize short-term gains and income distributions.
#5. Monitor Cash Flow
Are you being realistic about your budget? Have you done cash flow modeling and projections over the next several decades? How well are your investment portfolio(s) positioned to support your actual expenses and future needs and requirements? Things like: healthcare and long-term care; insurance coverage; retirement and business succession planning; required minimum distributions from IRAs and other tax-deferred accounts; estate planning and multi-generational wealth transfer.