Market Turmoil and Your Financial Plan

As you are aware, the capital markets and global economies are experiencing a tremendous shock. What was isolated to certain segments of the marketplace has spread to other areas. Naturally, this has translated into lower investor confidence – a phenomenon with which we can all relate.

Still, this is not completely unchartered territory. Time and again, the American economy has proven itself diverse and resilient in the face of widespread financial difficulties. Perhaps reassuringly, the U.S. government, particularly the Treasury Department and the Federal Reserve, has demonstrated that it will actively move to ensure the banking and insurance sector remains well capitalized and solvent.

There are many studies based on historical returns that indicate that selling out of your investments now might be unwise. However, if you feel that the current level of market volatility is too much for you to tolerate, I would suggest that we consider the following three options:

• Remain fully invested, but move to a more conservative investment objective that would have lower expectations of ongoing market volatility.
• Liquidate a portion of the assets to meet your required level of expenses for the next year while the market stabilizes and hopefully recovers.
• Liquidate the account in full and move to a 100% cash position.

Given those choices, I do want to emphasize the importance of staying focused on the long-term plan we developed before the current turmoil hit. I understand and appreciate the anxiety that is created by falling investment values. Yet historical-return studies suggest that staying the course may result in better long-term returns than if you try to time the market. Selling your investments after you have already experienced significant negative returns might preserve your current portfolio value but will also ensure that you lock in losses. Worse still, you run the risk of not being a participant in a market recovery.

You may intuitively believe that being on the sidelines is more advantageous to your portfolio, but it is very difficult to identify the exact time to buy and sell. Even missing a few days of big gains can be detrimental to your portfolio over the long term. Historical studies of markets have shown that a significant portion of the recoveries have taken place in the first few months after the market has finally bottomed.  Given the emotional and financial sting of selling your investments now, it may take you longer than you would expect to rebuild the confidence to reinvest. While the past does not guarantee the future, experience informs us that this waiting period is when many investors miss important opportunities.