Q4 Market Downturn – A Holiday Gift in Disguise?

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The renewed volatility in financial markets is once again reviving unwelcomed feelings among many investors—feelings of anxiety, fear, and a sense of powerlessness.  As we have discussed in past updates, these are completely natural responses.  What 35 years of riding the waves of choppy markets have taught us, is that maintaining the discipline not to act on these emotions, is the real key to a successful long-term investment plan.

To aid in this discipline, we want to remind investors of two investment truths that cannot be said enough: Nothing lasts forever, and market recoveries can come just as quickly as the prior correction. Just as smart investors temper their enthusiasm in booms, they keep a reserve of optimism during busts. While this is not to predict that a rapid recovery is in the cards this time, it is a reminder of the consequence of locking in losses without the reward of a recovery.

While it is easy to focus on the declines of current prices, the reality is that investors who stay the course will still own the same number of shares in each of their investments.  Since we believe that at some point in the future, these shares will be worth more than they are today, selling in the interim is the real risk for most investors.  As a reminder, for clients with anticipated cash flow needs from the portfolio, RTD has an individualized plan for you to produce the necessary cash flow for up to five years without needing to sell stocks at these depressed prices.  For those without anticipated cash flow needs over the next three to five years, any market declines in the interim truly represent an opportunity, not a threat.

With that background and in the spirit of the holidays, we challenge you to consider how this recent market downturn may present some longer-term positives that could be considered a holiday gift for many investors.  With our disciplined approach, RTD has been busy taking steps every day to help our clients ride through and ultimately benefit from these painful downside fluctuations in the markets.

For investors who have taxable investment assets, 2018 was shaping up to be one of the worst tax years in a decade with many mutual funds distributing large taxable gains and portfolio rebalancing earlier in the year generating significant capital gains.  Thanks to this recent downturn, RTD has been taking this opportunity to harvest tax losses where available with the goal of reducing or potentially eliminating this tax bill.

Speaking of rebalancing, RTD’s opportunistic rebalancing approach continues to add long-term value by selling high and buying low in those investments affected by volatility.  Earlier in the summer, we sold some of the gains from the strength of the last three to five years in U.S. large and small cap stocks in favor of the safety of bonds.  As this market downturn has intensified in recent days, the rebalancing opportunities are turning from defensive to offensive, now selling some bond funds which have gone up in value to buy more shares of the stock investments that have temporarily gone on sale.

With markets providing a last minute-holiday sale, for those investors with additional cash yet to be invested, this market downturn also presents the opportunity to add to their-long term investment plan.  In addition, those who have been investing these new dollars through a dollar cost averaging plan can benefit from this market sale by accelerating their investment plan.

Admittedly, this market downturn is emotionally challenging to maintain discipline in the short-term.  However, whether it is from the tax savings of loss harvesting, adding additional shares of stock investments through rebalancing, or investing new cash at current lower prices, it is truly creating opportunities that will truly be beneficial in the longer-term. 

With the holiday season being a time for reflection, in what has been a great 35th anniversary year for RTD and the services we are delivering to our clients, we wanted to express our gratitude for the trust and confidence you place in RTD to help provide clarity to the financial complexities of your lives.  We hope that our collective work, in turn, provides you with the peace of mind to spend this upcoming long holiday weekend focused on what truly matters.  Celebrating with your family and spending time with those who matter most in your lives. 

We wish everyone a Happy Holidays and a healthy and prosperous 2019!