Anyone can look good during a bull market. Smart investors are prepared to weather the inevitable rough patches and take advantage of market downturns.
First it is important to understand if your investment is performing better or worse than its category. A specific category, such as small cap value or large cap growth stocks, may be performing poorly altogether. But if your investment is performing worse than its category, you should seek to understand why and decide if you want to continue to hold the investment.
If you no longer want to hold an investment, you may be able to take a tax loss for investments held outside retirement or other qualified accounts. Selling in any account locks in any losses on an investment, but it also generates cash that can be used to purchase other investments that may be available at an appealing discount. Your research might turn up buying opportunities on investments that have dropped for reasons that have nothing to do with the fundamentals. In a down market, most stocks are available at lower prices, but some are better bargains than others.
It is also important to rebalance your portfolio. For instance, if you originally held 50% stocks and 50% bonds, you may find that during the market downturn your bond allocation has increased. When you return to a 50%/50% allocation, you are buying additional shares of stock at lower prices without having to add funds to your investment account. And, if you are reinvesting dividends and capital gains distributions, you may also be purchasing shares at lower prices. These additional shares can compound the growth of your account as values rise.
A volatile market is never easy to endure, but learning from it can better prepare you and your portfolio to weather and take advantage of the market's ups and downs.
For more information on these strategies, contact us. We're here to help.
Laura Mickels has spent more than 30 years working for investors with both Wall Street and independent firms. CochranMickels Retirement Specialists provides personalized planning and investment services to individuals approaching and in retirement.
These are the opinions of Laura Mickels and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.