Money & Finance

MONEY SENSE

THE ADVANTAGES OF Staying Invested

The year 2020 was very interesting in the investment world. The market took a big drop at the beginning of the year. Some people got very nervous and decided to get out and sat on the sidelines with a loss of value over the previous year. The Dow Jones average went from 29,346 on January 17th, 2020 to 19,173 on March 20th, 2020, a drop of almost 35% in a short period of time. For the people that panicked and sold out at the beginning of the drop and bought back in at the bottom of the market, that strategy worked well for them. Especially in a retirement account where you do not have to pay capital gains.

By December 31st, the value of the Dow Jones was 30,606, which was higher than it was when the market started to drop. It is interesting that on January 3rd of 2020, the Dow was at 28,634. So, if you stayed in the market and did not pull out at the bottom, you would have made 6.88% using the Dow Jones as an index. If you only looked at the beginning of the year values and the end of year values, you would have an OK year growth wise.

If you panicked and sold out at the bottom of the market and never got back in, you would have locked in a loss, missed a gain and possibly paid taxes on nonretirement accounts. A financial predicament indeed. We had a few people that came to us after having sold at the bottom of the market looking for a point to get back into the market. It is very hard to pick an entry point that is 30% plus more than when you got out. You cannot continue to buy high and sell low too many times without losing a substantial amount of your wealth. You never know when you will be at the top or bottom of the market. One way to minimize your risk is with an asset allocation that matches your risk tolerance. You should not try to gamble with your investments or buy investments with high risk or high leverage. An asset allocation that corresponds to your risk tolerance will help you ride out volatile markets.

There may be a time, unlike last year, where the market continues to drop, so it is a wise idea to check and possibly set stop losses where automatic sales are set up if the values of certain holdings drop. This cannot be done automatically with mutual funds, but it can be done with stocks and ETF’s.

Many of our clients who have stocks and ETFs in their portfolio use this strategy. We review their portfolio periodically throughout the year and adjust as the market dictates. As a result, they keep in tune with their risk tolerance and are able to maintain a comfortable level of risk. We want to avoid buying high and selling low if possible.

It is always a good idea to sit down or do a video call with a financial professional to help you design your portfolio and make changes to reduce or increase the risk level of your portfolio to match your risk tolerance.

Please email me at marcs@equityplanning.com and we can set up a time to review your portfolio. Equity Planning Inc. 7910 Woodmont Ave. , Suite 900, Bethesda, MD 20814

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