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Investing for the Long Run

By Barbara Trombley, CPA, MBA

 

As I write this article, the S&P 500 index, which tracks the performance of 500 large companies in the U.S., is down almost 22% for the year. Even more remarkable is that the Barclays Aggregate Bond Index is down more than 14% year to date. If the average investor had a 60% equities / 40% bond portfolio that followed these two indexes, they would be down 18.8% for the year! This is without any portfolio or advisor fees.

After many years of positive stock market returns, this is extremely unsettling for the average investor. Usually, investing in bonds or ‘fixed income’ serves as a buffer to the stock market by providing what is usually a more conservative return. This year, because of rampant inflation, the Federal Reserve has rapidly increased interest rates. Bond prices and interest rates move in opposite directions, leading to large drops in bond prices and, therefore, a depressed bond market.

Barbara Trombley

Barbara Trombley

“Sometimes during volatile market periods, an advisor may strive to counsel a client to change their withdrawal strategy from their portfolio or offer advice on large purchases that can be financed another way.”

As a financial advisor, I wear many hats. The obvious one is that I provide investment guidance and strive to help my clients make financial choices. A less obvious role that I play is that of cheerleader. At times, some investors are very tempted to sell out of the market when times are bad. They feel nervous and uncomfortable. But history has shown us that investing is a lifelong event. A financial plan needs to be followed in good markets and bad.

There is a J.P. Morgan asset-management study that shows that seven of the best ten days in the stock market occurred within two weeks of the ten worst days. Since Jan. 1, 2002 through the end of 2021, for example, an investor who was fully invested in the S&P 500 would have returned 9.52% year over year (without fees). If the same investor missed the 10 best days in the market during that same time period, their return may have been 5.33% year over year (without fees) — almost half! An advisor will strive to provide guidance and education to prevent their client from making rash decisions.

Another area where an advisor can assist clients during volatile stock-market periods (and other times as well) is, if appropriate, potential tax-loss harvesting. If an investor has money that is not in a retirement plan, they can sell positions held at a loss in order to offset any gains held in other stocks. The investor can also offset $3,000 in ordinary income each tax year (if he or she has already offset gains) and carry forward unused losses to be used against gains in future years.

The investor would want to be aware of wash sales rules, which prohibit selling an investment for a loss and replacing it with the same or a ‘substantially identical’ investment 30 days before or after the sale. This would void the loss that the investor was deliberately trying to achieve. The investor is allowed to sell a stock at a loss and buy a similar one in the same industry so that he or she can continue to have their money working for them. Tax planning in volatile times could be part of your financial plan as well.

Sometimes during volatile market periods, an advisor may strive to counsel a client to change their withdrawal strategy from their portfolio or offer advice on large purchases that can be financed another way. I have often counselled clients on the options available to them, from where to draw money for their monthly expenses. In a volatile market, for many clients, using cash savings to pay monthly expenses can take the stress off a portfolio that has declined.

The greatest benefit to you from using a financial advisor is having someone to listen to you, someone for you to seek out and reassure you that, based on history, industry knowledge, and their experience in the financial world day after day, you can pursue financial independence.

 

Barbara Trombley, MBA, CPA is an owner and financial consultant with Trombley Associates. Securities offered through LPL Financial. Member FINRA/SIPC. Advisory services offered through Trombley Associates, a registered investment advisor and separate entity from LPL Financial. This material was created for educational and informational purposes only and is not intended as ERISA tax, legal, or investment advice. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

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