Gloom overshadows the stock market.  Financial experts say these are the ways to stay invested.

Gloom overshadows the stock market. Financial experts say these are the ways to stay invested.

In the new Netflix documentary “Get Smart With Money”, financial adviser Shareef “Ross Mac” McDonald tries to persuade struggling NFL player Teez Tabor to invest in the stock market.

“The easiest way to be a player in the game is to put your money in the S&P 500 SPX,
+0.52%,
because on average it’s going to increase by 10% every year,” he says.

The show, of course, was filmed before the latest market downturn, which sent the S&P 500 down nearly 20% this year and the VIX Volatility Index VIX,
-1.71%
on the rise. As we enter another tough week for equities, McDonald’s posted signs on its Instagram channel, @imrossmac, that suggest we could be heading into a global recession.

Tabor, meanwhile, has just been picked up by the Seattle Seahawks. So he can probably ride out the downturn by working on it, as most financial advisers would advise clients who are worried that markets won’t rebound the way they did at the start of the Covid-19 pandemic.

The Federal Reserve’s policy-making committee is expected this week to raise official interest rates by at least 75 basis points for the third straight meeting, the most hawkish stance in more than 40 years. Higher rates to stamp out embedded inflation have shocked stock and bond markets this year. The economy has contracted for two consecutive quarters.

“People have this recovery ingrained in their heads, but this time it might not be a V-shaped recovery. It could be a U-shaped one instead,” says Caleb Pepperday, certified financial planner at JFS Wealth. Advisors in Pittsburgh.

But it still underscores his hope, and near certainty, that markets will eventually rally. They always have, after all. In the past 100 years, there has never been a 20-year period in which the US stock market has not generated positive returns.

“Containing the risk”

“You have to bear the risk in the short term, which is painful, but in the long term things will go back to normal,” says Roger Aliaga-Diaz, global head of portfolio construction at Vanguard.

For financial planner Scott Bishop of Avidian Wealth Solutions in Houston, Texas, the market downturn is a buying opportunity. His strategy with clients’ money is to keep a portion of their portfolios, usually around 10%, in laddered treasury bills spread out in two-week increments, ranging from about six months to a year. As each tranche matures, he and his clients decide their view of the market at that time.

“I ask: do we agree to put in the money? And if not, we’ll push it back to the end of the line,” says Bishop, and reinvest it in the TMUBMUSD10Y Treasury,
3.482%.

If there is a sudden buying opportunity, such as the S&P 500 breaking through a key support level, then it could accelerate the two-week cycle and sell the next maturing Treasuries early to free up cash to buy stocks. shares.

“It’s instant liquidity, so I can deploy and then email clients to update them,” he says.

“Always have cash on hand”

What you do when the stock market goes down largely depends on your time horizon for needing money. The hold strategy works best for those who can wait at least three to five years. That goes even for retirees who have invested part of their nest egg, says Ed Slott, retirement expert and founder of IRAHelp.com.

“But you should always have cash in your IRA or other investments that can be like an emergency fund, so you can use that if you need it instead of having to dip into stocks. in a declining market,” says Slott.

People over age 72 who are subject to required minimum distributions from their qualified retirement plans like IRAs and 401(k)s know well in advance how much money they will need for the year and should plan well in advance. advance. The amount is based on a formula that takes into account your age and your account balance from last year, so it might seem like a bit of a bite this year, given that your balance is likely lower.

If you’ve invested all of your IRA, Slott suggests speaking with a financial adviser to determine what items you might want to liquidate to cover the RMD amount or living expenses you need.

If you really don’t want to cash out your stock holdings, you can transfer them in kind to a taxable brokerage account.

“You still pay the tax on the amount, but then you would have the stock in a regular account, so you never really sold it,” Slott explains.

According to Slott, the key thing to remember about stock market downturns is this: you don’t have less until you sell.

“If you sell when the stock is down 30%, you need to gain 43% to get back to where you were. If you have something that’s 43%, it’s probably beyond the risk tolerance level with which everyone would be comfortable with,” says Slott. “That, in a nutshell, is the problem of shrinking in a declining market.”

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