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How Fund Investors Can Respond to Current Fears

It’s unnerving to see the headlines and predictions about the coronavirus, whether you’re a fund investor who has been invested for years or you’re just starting to invest.

When there’s so much uncertainty, it’s natural to feel like we should do something, but what's the right investing move to make?

When we feel threatened, we instinctively want to try to protect ourselves and our assets, and that can lead some investors to put their investment plans on hold.

They stop investing, or some even sell out of the stock market, assuming that they’ll start investing again later when things have settled down.

Do things ever really settle down?

The reality is that there’s almost always some cause for concern for fund investors. Last year, it was the inverted yield curve and recession fears. At the start of 2020, it was the potential military conflict with Iran. Now, it’s the coronavirus, and soon it’ll be the US election. And after the election, there will be something else.

Often people assume they’ll be out of the market for a short time—until things clear up or they get more information. But we have more information today on the coronavirus than we did a month ago, and this doesn’t make the future any clearer and it doesn’t make it easier to invest.

Should I buy, sell or hold?

It depends. 

The right response to current fears depends on your goals and needs.

Most fund investors are better off positioning for the long term and riding out near-term pullbacks. However, for some investors, market downturns can be a chance to buy funds and ETFs at lower levels. Other fund investors may choose to dial down risk. Here are five moves actives investors might consider:

Is this a good time to invest?

If you have money on the sidelines that you won’t need for a decade or so, and you’re OK if the market continues to decline for now, then a downturn could be a good time to get some of it invested in funds and ETFs.

When should I rebalance?

If you have a balanced account and your equity holdings are slightly underweight due to the market decline, you could rebalance back to your target by selling a bit of your bond funds and buying more stock funds. 

Should I change my portfolio?

If you’ll need your money sooner rather than later, or you know that you can’t afford to lose much more than this, then it could be time to lighten up on equities. 

How should I invest if I'm nearing retirement?

Market declines are particularly risky for fund investors who are a few years away from retirement or a few years into retirement, as we wrote here. A big loss early in retirement can undo years of investment success. You run a higher risk of running out of money if you retire in a bear market because you’re withdrawing from your portfolio while it is losing value. If you’re in this position, then the recent volatility may be a wake up call that it’s time to change your allocation or dial down risk.  

Can I use down markets to lower my investment taxes?

If you have taxable accounts, this could be an opportunity to realize losses, which can lower your tax bill. 

Keep risk in mind

If you feel like you have to do something right now, then try to do something relatively small that can help you avoid taking more drastic action later. For instance, you might sell 10-30% of your stocks if it helps you avoid selling 100% down the road. However, you should recognize that selling now means locking in recent losses and potentially missing out on gains when the market bounces back.

The takeaway here is to make sure you understand the risks before you make any sudden moves. This is what we are doing with our wealth-management clients to help them invest through 2020's changing markets.

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