With the S&P 500 losing about 9% so far in 2022 and Nasdaq down more than 13%, the old adage about wise investors making most of their money during a bear market can't be overstated for some investors, according to Christine Benz, Morningstar director of personal finance.
Volatility, especially Monday’s roller coaster ride, was a “doozy,” Benz said in her latest blog.
You don’t have to be “an investment genius to know it’s rarely wise to sell equities in such an environment, if you can avoid it,” the veteran analyst admitted.
But while advice to “stay the course in a falling market” is usually sound, it also assumes a number of factors that may or may not be true of today’s investors. The biggest such assumption is that “the underlying investment plan and asset allocation are well-thought out and well-intended,” Benz said.
The fact is, until the stock market began to slide, we have all been living in an era where the fear of missing out induced many new investors to jump head-first “into risky assets with the hopes of overnight riches. It’s a big leap to assume that many of these newbies were operating with an underlying plan or even an appreciation of investing basics like asset allocation, diversification and the role of time horizon,” Benz said.
Even those investors who began their investing journey with a plan may now find themselves “unmoored,” she added, especially given how well the stock market has performed. Even portfolios that five years ago started out relatively conservative with allocations of 60% US stocks and 40% equities now have an allocation of 72% stocks, thanks to ebullient market returns. she said.
As a result, many investors have been loathe to replace profitable U.S. equities with bonds that had “dinky returns” or even international stocks, which have lagged, she said.
“For all of these reasons, I think there are plenty of investors who should be lightening up on stocks during the current market downdraft,” Benz said.
Who are the leading candidates for U.S. equity sales in a market that is down trending? Investors getting close to retirement who need to de-risk, those who will bail if the downturn worsens and folks with tax losses are all candidates for equity sales, Benz said.
For soon-to-be retirees, “the ability to absorb big losses in our equity portfolios declines as we get closer to drawing from our portfolios,” she said. As a result, it’s wise to start the process of shifting to a larger allocation of bonds and cash, she said.
Benz recommended that retirees’ portfolios ideally hold 10 years’ worth of cash and bonds. Recent Morningstar research also supports that, finding that balanced portfolios generally support higher withdrawal rates than more equity-heavy allocations do.