Keep perspective – recessions have typically lasted between six months and 18 months, a small period of time for the long-term, strategic investor. Market reactions to recessions have been mixed in the past, but the current trend in the U.S. appears to be toward the negative side. Recessions can’t be officially declared until you are well into one, but investors appear to believe we are in one. However, if you consider the losses to date, the eroded gains are not devastating to the long-term investor. As of Jan. 17, it has eroded 15 months of performance from a long bull market.
Dollar-cost averaging is the process where you invest small portions of a large investment over time versus placing that large investment in the market all at one time. It’s a great way of reducing regret when future market performance is extremely uncertain.
The recent market decline creates a buying opportunity for long-term investors. When prices are low, investors acquire more shares for every dollar they invest. Additionally, the government incentive for individuals 50 and over to catch up with additional contributions in tax-qualified programs like 401(k)s and IRAs still exists. So, invest that extra money now and pick up additional shares.
Wise investors always plan for large, near-term liquidity events by taking their money out of the equity market and putting it into something less risky than equities. If you have investments in equities and were planning on taking a large distribution in the near term, consider waiting or spreading out the withdrawals. If you can’t wait, explore financing options or use a line of credit so you don’t end up selling more shares than absolutely necessary.
Avoid hitching your wagon to just one horse. Markets are global and the explosion of ETFs has brought a number of hard-to-invest-in asset classes to the general market place at a reasonable cost. International stocks, timber, commodities, natural resources, international real estate and other alternative investments are great diversifiers to portfolios with heavy U.S. exposure.
Jonathan Scheid is vice president of Bellatore, a financial services company that delivers knowledge leadership services, turnkey asset management solutions and practice equity monetization services.