Many long-term investors wonder if they should take action when markets suffer a downturn or become volatile. Should you sell equities and turn to the safety of cash? Should you stop making regular investments? Such thoughts are understandable, but these actions can decrease portfolio value over the long term.
During a market downturn, investors who sell equities in favour of low-interest investments (or securities) can lose out in two ways – they lock in the loss when selling at lower values, and they reinvest at more expensive prices when markets rebound. Plus, putting a stop to regular contributions can result in missed opportunities. By continuing to invest regularly, you purchase equities when stock prices are lower, which can lead to solid gains once markets recover.
A time you should move a portion of your portfolio to lower-risk investments is when you’re approaching a major investment goal. Make education savings more conservative when your child is a few years from secondary school graduation. Safeguard your retirement savings when you’re about five or more years from retirement. This way, you help preserve your investments against potential market declines at a crucial time.
Some people approaching a financial goal worry about missing out on profits if they reduce equity holdings during a strong market. But say these investors began safeguarding their portfolios in January of this year. What if they held off because in 2019 almost every major stock market around the world posted double-digit returns? They would’ve been in for a scare one month later when the coronavirus pandemic rocked the markets. Chasing gains is risky when your future is at stake.
Let us know if you have any questions or concerns about investing in volatile markets or when to safeguard your portfolio as an investment goal nears.