In 2018, the second longest bull market took an unsettling turn.
During the last two weeks of the year, the market experienced historic volatility and a dramatic correction. The Dow Jones Industrial Average fell more than 350 points six times in a 10-day period — then rose by 1,000 points in one day — the biggest gain in points ever recorded. For the year, the Dow was down 5.6 percent, the S&P 500 sank 6.2 percent and the Nasdaq composite fell 4 percent.
In 2019, it is likely that uncertainty will continue to impact the stock market. Fundamental economic indicators — from GDP to job growth — are still strong, but the business cycle is maturing and the economy is beginning to slow. Volatility is likely to continue, as many investors continue to worry about news dominating the headlines — from gridlock in Washington to potential trade wars to geopolitical tension. The looming possibility of a bear market is also a growing concern for many investors.
[See: 10 of the Best Stocks to Buy for 2019.]
But don’t let emotions about market declines and volatility — however valid — drive you to react in a way that may negatively impact your portfolio and your long-term financial plans. Corrections and downturns are part of the market cycle. In a poll conducted by Nationwide Advisory Solutions last year, we learned that the vast majority of registered investment advisors (RIAs) and fee-based advisors anticipated client concerns about the market’s decline — taking action to protect their clients’ portfolios at the same time that they identified buying opportunities.
Here’s how you can resolve to invest with intent and face market volatility in the New Year.
— Look for potential upside in a down market.
— Stay invested.
— Continue to invest during stock market swings.
— Protect your portfolio.
— Work with an advisor to stay focused.
Look for Potential Upside in a Down Market
During a bear market — which lasts roughly 13 months on average, based on trends observed since World War II — stocks can be purchased at a 20 percent discount. In 2019, there is likely to be a rare opportunity to “buy low” and invest more cost-effectively while stock markets are down, but overall economic conditions are still strong. And, right now, there are many encouraging economic indicators. The Bureau of Labor and Statistics reported in December a low unemployment rate at 3.9 percent and strong wage growth at 3.7 percent, and employers in the U.S. added more than 2.6 million jobs in 2018.
Younger investors may find these conditions particularly attractive. If you are in your 20s or 30s, consider asking your advisor if it makes sense to take advantage of these lower-cost buying opportunities and invest more aggressively through a market downturn.
Stay Invested to Accumulate More for Your Retirement
Year over year, investors say that saving enough for retirement is among their top three financial concerns, according to our annual Advisor Authority study of more than 1,700 RIAs, fee-based advisors and individual investors. Much of Americans’ wealth is invested in their retirement savings. In fact, U.S. retirement market assets were valued at $27.2 trillion as of the third quarter of 2018, according to the Investment Company Institute.
While retirement assets can be subject to market volatility, those who stay invested in the market during a downturn can recover, on average, in 22 months.
You may be tempted to pull out of the market to miss the worst days, but any attempt to time the market is also likely to lead to missing the market’s best days. And this behavior means that the typical investor earns one-third less than the market on average, according to a recent analysis by the Nationwide Retirement Institute.
[See: 10 Long-Term Investing Strategies That Work.]
Studies have also shown that if an investor had decided stay in the market through the crash of 2008, a decade later they would have seen their portfolio rise about 2.5 times including dividends. An investor with $100,000 would have seen their portfolio increase to $250,000. And investor with $400,000 would have seen their portfolio increase to $1 million.
Continue to Invest During Market Swings
This strategy, known as dollar-cost averaging, smooths out the price you pay for stocks over time. Market downturns can also present you with an opportunity to consider new types of investment options and unique buying opportunities. Continue to maximize contributions to qualified retirement plans even during downturns — especially when you are offered an employer match — or risk leaving money on the table. For those investors who have maxed-out their qualified plans, an investment-only variable annuity with lower costs and a wider selection of fund choices can help maximize tax-deferred accumulation.
Protect Your Portfolio
Year over year, investors also say that protecting assets is among their top three financial concerns, according to our annual Advisor Authority study. And while slightly more than half of investors (57 percent) said they had a strategy in place to protect their assets against market risk, the vast majority of RIAs and fee-based advisors (93 percent) said that they have a strategy in place to protect their clients’ assets.
Diversification was cited as the number-one solution across the board. That means the right mix of different types of stocks and bonds, both domestic and international. Liquid alternatives, smart beta exchange-traded funds and other non-correlated assets were also cited among the most widely used solutions to protect portfolios. You may also want to talk with your advisor about fixed annuities, fixed-indexed annuities, and other types of variable annuities with principal protection, especially if you are more risk averse.
Work With an Advisor to Stay Focused
When investing, uncertainty is a given. Investing with intent means avoiding rash decisions in response to unpredictable markets today that can impact your financial security years from now. And the most important thing you can do to invest with intent is to have an unbiased advisor who understands your unique needs, who is aligned with your best interests, and who can help you develop holistic financial plan based on your long-term financial goals.
Suffering financial losses is a very real fear. These concerns can be compounded by all the uncertainty in the news and in the markets. An unbiased advisor can help you keep a cool head when markets heat up. They can help you remain focused in times of uncertainty by addressing the questions that matter most, such as “How does market volatility impact my ability to retire on time?” and “Can you help me evaluate my investment options to ensure I’m on track to save enough for my child’s college education?” An advisor committed to your best interest will help you effectively navigate short-term pressures — and also identify hidden opportunities in a volatile market — so you can stay the course and build more wealth to reach your long-term goals.
[See: Avoid These 8 Rookie Investing Mistakes.]
Resolve to work with an advisor so that you can invest with intent.
Disclosure: This material is not a recommendation to buy, sell, hold or roll over any asset, adopt an investment strategy, retain a specific investment manager or use a particular account type. It does not take into account the specific investment objectives, tax and financial condition or particular needs of any specific person. Investors should work with their financial professional to discuss their specific situation.
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