In today’s environment with concerns of inflation and the potential of an upcoming recession, many financial advisors will recommend “staying the course” and focusing on long-term financial goals.
Though individual circumstances vary, conventional wisdom dictates that your best course of action during a stock market downturn is to leave your stock portfolio unchanged (don’t sell), and give the investments adequate recovery time before selling, which can take weeks, months or years. However, not all investors have the luxury of time, so what is the best “Plan B” if holding indefinitely isn’t an option in the short run? Let’s expand on these concepts.
The case for staying the course
First, there is a reason “staying the course” is widely accepted as the optimal investor response to a stock market downturn. It comes down to data. We have about eight decades of historical stock market returns – since the Great Depression in the 1930s – to inform us. That data overwhelmingly indicates that during a market downturn, regardless of duration, leaving a stock portfolio unchanged and refraining from selling stock during the down period yields superior results over time. In percentage terms, the portfolio recovery is larger than if an investor had sold stocks when the market was down (thereby realizing a loss) and then bought stocks back at some point in the future when the market had sufficiently recovered.
Market volatility can cause a lot of short-term emotion, but it is important to make investment allocation decisions based on long-term financial goals. As the global economy grows over time, equities grow and compound. Staying in the equity market is key to realizing the benefit of this compounding.
What if staying the course isn’t an option?
There are a few scenarios in which an investor needs to sell stock when markets are down. For example, an investor may have an immediate cash need. So, what is an investor to do in this situation?
With an immediate cash need, consider the following alternatives:
1. Consider using other sources of cash, such as checking accounts, savings accounts, money market accounts, or other cash equivalents if they are available. You can plan to replenish these accounts in the longer-term by selling stock when the stock market has sufficiently recovered.
2. Determine if the immediate cash need has any degree of flexibility. Can it be reduced or postponed in the short-term? Even fixed expenses such as mortgages, debt payments, property taxes, income taxes, and other ironclad obligations can sometimes be temporarily suspended or deferred during extremely challenging times. Contact your financial institution/lender, local tax authority, or income tax preparer before making any changes to your payment schedule. Never assume that skipping a payment is permissible.
3. Consider using a line of credit or other lending facility in the short run. Depending on the size of the cash need and length of time before a sufficient stock market recovery occurs, the interest cost on the short-term use of a line of credit can be dramatically lower than the dollars lost by taking a significant stock loss in order to generate cash. If you do not have a line of credit or other lending facility currently in place, contact your private banker to explore this opportunity.
While “staying the course” is often the superior course of action, individual circumstances and the ability to do so can certainly vary. Always consult with your wealth advisor first to determine what is best for your unique situation.
Bankers Trust Company is a Member FDIC insured institution. BTC Capital Management is a SEC registered investment adviser. Bankers Trust Company and BTC Capital Management are affiliated, but separate entities. This article is provided for informational purposes only and is not intended as investment or tax advice. Non-deposit investments are not insured by the FDIC or any government agency and are not bank guaranteed. All investments involve risk, including the possible loss of principal.