For the past several months, pundits have been talking about the current economic crisis and downturn in the economy. How long can an economic crisis last, and what ramifications does it have for your investment portfolio?
Economic turmoil can wreak havoc with short-term investing. If you know you’ll need cash in the short-term, you may need to sell investments at a loss in order to raise money. You may be tempted to reallocate your portfolio positions based on yesterday’s news, and frequent trading may not be the best way to meet your long-term financial goals.
Lather. Rinse. Repeat… May be good instructions for washing your hair but not your investments.
An important rule of thumb to remember before you make changes to your portfolio is that money is like soap: the more you touch it, the smaller it gets. Additionally, if you are an American citizen, the short-term capital gains created by frequent trading are taxed at higher rates than long-term gains.
Let’s be clear: I’m not advocating never adjusting your portfolio or holding on blindly to investments. I’m advocating sticking to a well-made financial plan that diversifies your long-term investments according to your risk tolerance. A well-diversified portfolio may be more important than timing the market in times of crisis.
If you still believe in the fundamentals of the companies you invest in, and are optimistic that the future looks brighter than the present, then remaining invested for the long- term may be a good move.
“Never sell these stocks”
One client recently told me that her father had bought some stocks decades ago which he bequeathed to her. His instructions had been, “These are great companies. Never sell these stocks.” That would have been excellent advice if he had bought some of the current tech giants. But instead, his choices had been in lackluster industries. Although he loved these companies, the stock market didn’t, and now his daughter was left holding a pretty small portfolio. The lesson: Pay attention to your portfolio or call a professional for help.
For more information on how to invest when you can’t predict market direction, click here.
Douglas Goldstein, CFP®, is the director of Profile Investment Services, Ltd. www.profile-financial.com. He is a licensed financial professional both in the U.S. and Israel. Call (02) 624-2788 for a consultation on how to set up your American assets to meet your financial goals. Securities offered through Portfolio Resources Group, Inc. Member FINRA, SIPC, MSRB, FSI. The opinions expressed are those of the author and not those of Portfolio Resources Group, Inc. or its affiliates. Neither PRG nor its affiliates give tax or legal advice.
Published September 3, 2020.