How to Manage a Portfolio Through an Injured Market
Hello. This is James Studinger, financial planner and author of Wealth Is a Choice. I believe that it is a choice, and that people get wealthy by buying things that make them more money. I also believe people get poor by buying things that cost money to maintain or depreciate in value.
The topic for today is managing through an injured market.
I was training for a trail run in the Upper Peninsula of Michigan called the Marji Gesick. It’s organized by fantastic people that love to see others succeed. But you’d never guess it from their messaging. If they can squeeze an extra boulder ridden hill in the route they will. I believe the previous year finish rate on the run was around 23%. This is something you train for. I was in good shape and hitting my scheduled training with three weeks to go. Rounding a downhill bend around Pontiac Lake trails I stepped on the side of a softball sized rock, instant ankle sprain. I finished the loop gently and went home to nurse my wounds. My training was unwelcomingly over. Now it was all about the rest and recovery. My focus shifted from building endurance, to instead treating my injury and patiently waiting for things to heal. It was disappointing, and of course a little stressful not knowing if I’d fully heal in time for Marji. But I’ve been injured like this before. I knew what to do, and I knew healing would come. I didn’t need to focus on the negativity of the downtime. Instead, I took the time away from training to catch up on other things, and made sure I was ready for when I could run again.
We are currently experiencing a financial injury. Portfolios are down, and for some, years of hard work savings are sitting at a loss. It is frustrating to see significant returns be wiped out in a matter of months. It can also be confusing. The market has had periods of strong performance, and sometimes it doesn’t make sense that a 401k balance could lose all those gains so quickly. Previous gains create larger account balances. And when a market falls by an equivalent percentage, the dollar amount drop exceeds the previous gain.
For example, if someone had $500,000 in their 401k and it earned 20% in one year, the new balance would become $600,000. If the account fell 20% the following year, the new balance would be $480,000. It’s easy to assume in our heads that a 20% fall would wipe out the gain and put the balance back to $500,000. But simple math illustrates how that isn’t the case. What makes matters worse is if the market falls a larger percentage than the previous year’s gain. In this example, if the market fell 35%, the new account balance would be $390,000.
A market needs not only recover from a percentage standpoint, but it also needs to reach new highs in dollars gained for portfolios to regain prior balances. For example, if the account now worth $480,000 were to grow by 20% the following year, it would reach a new balance of $576,000 – still below it’s $600,000 previous high.
Change of Strategy
A down market often requires a change of strategy. Sometimes by force, and sometimes because opportunities arise. When I injured my ankle, I had to change my strategy from building endurance, to rest and recovery. When an economy injures an ankle, investors can also change their strategy.
Most pre-retirees should buy heavily into the downturn. Even though their hard earned savings of yesterday look ugly, if you believe as I do that eventually this market will recover, then you gobble up as many shares as you can before that happens. Buying shares means investing into stocks and mutual funds. The more shares you own, the greater you will enjoy a recovery. For example, if you own 1,000 shares of XYZ mutual fund, each valued at $100, then you have an investment of $100,000. If those shares go up in value by 20%, then you now have an investment of $120,000. If you buy an additional 500 shares of the mutual fund before the market recovers, then your investment will be $180,000.
Most retirees, on the other hand, are not buying new shares of investments. Instead, they are making sure they don’t have to sell shares at losses. Hopefully they had enough money out of the stock market that they can use for their living needs. Then, when the market recovers, they still own all their original shares of their equity investments, to bring them back to their previous portfolio highs.
Be Patient and Have Confidence
When I injured my ankle, I had to have the patience to heal and the mental confidence that I would heal. That allowed me to enjoy other things during that unasked for period. A big difference with my ankle recovery and a bad stock market is the understood time frames before we are back to good. I had injured my ankle before and knew approximately how long it would take to heal. So long as I did what I was supposed to, the timing of my outcome was predictable. Economies and stock markets falter for a huge variety of reasons, and no situation is exactly like another. It’s not like getting an x-ray, and a cast, with the doctor telling you she will take the cast off in 3 months. I’ve seen markets recover in years, and I’ve seen it just take months. We won’t know until it’s happened. But the good news is that I’ve always seen them recover. Carry that confidence, adjust accordingly, and be patient.
If you are wondering, I did run the Marji, and I did finish.
Thank you,
James Studinger
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. JP Studinger Group, LLC is not affiliated with Kestra IS or Kestra AS. Investor Disclosures: https://www.kestrafinancial.com/disclosures
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.