By John Drachman
It was March 2009 when David Letterman married his long-time girlfriend, Alaska’s Mount Redoubt erupted – and the biggest market pullback since the Great Depression finally bottomed out. The S&P 500 Index had closed below 700 for the first time in 13 years spurring Goldman Sachs to warn investors to expect the benchmark large cap index to sink to 400.
Instead, investors rallied and sent the S&P 500 to 3231, a 378% gain through year-end 2019.
Now, just over one week into the New Year as the U.S. and Iran engage in tit-for-tat hostilities, the markets again appear to be testing their risk-off mode:
- The S&P 500 fell more than 1% on Friday, with the two other major U.S. stock indexes also down considerably.
- Crude oil jumped 4% on fears supplies will be drying up. Conversely, fuel-dependent airline stocks tumbled.
- Investors headed for safety, sending prices on the 10-year U.S. Treasury soaring.
So, is now the excuse you needed to sell your sky-high equity holdings?
UBS Chief Investment Officer Mark Haefele for one thinks not. “Geopolitical events by their nature are unpredictable,” he said recently. “But previous periods of increased tensions suggest that the impact on wider markets tends to be short-lived.” History bears him out. Market reversals have generally proven to be of much shorter duration than originally feared.
Still in some cases, re-allocating a portion of assets from equities to something less risky – even cash – can be appropriate, even necessary, based on your age, lifestyle and investment objectives. While baby boomers for instance were made whole the last time around, their time frame for recouping investment losses has shrunk considerably. The S&P 500 decline that began on October 10, 2007 lasted 16 months as the benchmark shed 3.2% a month for a total loss of -50.95%. A beating of that magnitude required a 104% return to breakeven – 37 months later.
If your nerves are fraying as you hold onto major gains in the face of potential market instability, consider two thoughts many wealth managers share with their clients prior to selling a major, top-performing holding:
- Strategic objectives above all. Emotions alone are usually not the best guide to buying or selling securities. Your investments cover a wide range of short-, mid- and long-term objectives. Beyond “nerves,” what’s changed about your situation? If you need to talk this through with someone, a licensed financial advisor can help.
- Think tactically about diversifying risk. The last recession introduced many investors to highly diversified portfolio ideas that combined active selection with passive, beta-oriented approaches.By adding a greater degree of diversification through tactical sector allocations, for example, you can make short-term course corrections while still pursuing your longer-term goals.Some ETF portfolios employ rules-based algorithms that can shift a portion of assets to cash if and when conditions warrant.
Building a tactical downside buffer into your portfolio works best when you clearly articulate your hopes and fears first. Combining long-term strategy and shorter-term tactics in a single, holistic portfolio can not only provide you with the risk management you need but also help lock in the gains you want.
John Drachman is a contributing writer to www.myperfectfinancialadvisor.com, the premier matchmaker between investors and advisors. John is an IABC award-winning writer, who applies his 30 years of financial marketing experience toward advancing the dialog between investors and investment professionals.
