Some may say now is the time to get out of the market. This summer, the market hit an all-time high and continues to rise. It seems as though the Brexit never even happened; however, it was as recent as June 2016 that it cost the market a 5% one-day loss. Many would say that the market is over inflated, Wall Street has been on a vacation and a turbulent election will influence a correction in the market.
So what should investors do? To answer this question, put yourself in one of the following categories:
1. Long-Term Investor: This is someone who is investing their money for five or more years and has a tolerance for market fluctuation.
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2. Cash Investor: This investor has cash sitting in the bank and doesn't know whether to put their money into the market or wait.
3. Retirement on the Horizon: This investor has fewer than five years until they need to use their funds for income.
The Market Is Too High
Those who are worried about a market correction should keep in mind that over the last 30 years Standard & Poor's 500-stock index has only been negative in five out of 30 years. That means the market has been positive 83% of the time. This is a glaring fact that investors find surprising. Most of us are emotional investors and dramatize the loss because it hurts more than the gains. The S&P 500 has gained more than 17% annually over the last 6.5 years, so it comes as no surprise that investors might want to think about getting out now.
As a long-term investor, you owe it to yourself to take the emotion out of the process. Don't guess your way in and out of the market. For example, I had a client in 2012 tell me that they felt the market was flying too high and wanted to take the gains and go to cash. At that point, they had recovered all their loss from the 2008 financial crisis. They were long-term investors, and I recommended they stay the course. Since that point, they gained an additional 54%. I could have easily agreed with them that going to cash made sense because they were above the pre-financial crisis balance. But I knew, because they were long-term investors, they would benefit over time by staying invested.
As a cash investor, it is best to put your money to work for you over a period of time. This is called dollar-cost averaging, which spaces out the same investment purchase over several months. This results in buying your investments at the average price over the period decided upon. Below is an example of how dollar-cost averaging can benefit an investor.
In this example, if the client invested the full $4,000 on January 1st, they would have bought all the shares at the highest price. By using dollar-cost averaging, you have reduced the risk of purchasing all funds at the possible highest price.
If retirement is on the horizon, and you are within five years of using your funds, consider this a good time to possibly move to a more conservative allocation. Due to this short time horizon, you have very little time left to make changes to your allocation. Because the market has done so well recently, you may want to consider this an opportunity to move a portion of your assets from equity to fixed income.
Does the Election Make a Difference to Investors?
This election is different from any other. But the fact is all elections are different from any other. Many people believe each election will affect the economy and even change the course of history. In a day and age in which media is abundant and influential, certain stories are bound to effect the stock market for some periods of time. Still, the approach that is outlined above stays sound whether the market is too high, the election changes everything or some other headline shakes the economy. To give you some extra confidence, here are some statistics on market performance from 1945 through 2015, according to Russell Investments:
- In the 36 years that we had a Republican president, the S&P 500 returned 10.0%;
- during the 35 years in which a Democrat served as president, the S&P 500 gained 15.2%;
- and in 17 presidential election years, the index returned 9.9%.
Final Thoughts for Year-End Investing
Long-term investors and cash investors need to stay the course, focus on longer-term averages and realize it is difficult or impossible to time shorter-term impacts. Make a plan and stick to it. Also, consider rebalancing your accounts. Investors that are close to retirement may want to consider a move to a more balanced portfolio. All investors need to keep their risk tolerance and timeframes in check and understand that markets will correct, but the odds are in your favor when you stay invested.
Robert Auclair is an independent registered investment adviser in East Greenwich, Rhode Island. He combines his financial-knowledge base with a unique ability to match clients' emotions and goals to their balance sheets. He grew up with two teachers as parents and believes that clients need to understand to succeed.
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