Risk on, Risk off

November 03, 2022 By Brian Horan, CPWA®
Man reading paper on front porch. West Financial Services.

If recent stock market gyrations have given you some sleepless nights, we have some thoughts on what you can do to reset and face the challenges ahead. While declines of 20% or more are expected to happen from time to time, a loss on paper is just that, and now is a good time to reassess how you are feeling as an investor in today’s market.

You are probably familiar with the ubiquitous “Risk Tolerance Questionnaire” that helps investors determine the amount of market volatility they can comfortably handle and recommends a personal investment allocation strategy. The problem with these surveys is that they are hypothetical in nature and an investor’s answers are often influenced by the market returns experienced around the time they are completing the exercise. Many investors will say they are comfortable with the risks associated with stock market investing when things are good. But behavioral science tells us that we feel loss more acutely than we feel happiness, so setting your allocation percentages during bull markets may overestimate your tolerance for volatility and risk. The silver lining for investors is that they do not have to think hypothetically about declining markets, if they have been investing since at least 2018. The end of 2018, the spring of 2020, and most of 2022 have given investors a real life experiment on how they feel when equity portfolios decline more than 20%. So, take some time while the markets are still well off their highs to re-evaluate how nervous you have been feeling this year about your investments. Talk to your relationship manager to see if you should make any portfolio changes going forward to better prepare for the next downturn. 

On a more positive section of the balance sheet, while the stock and bond markets have struggled this year, home values are still near their recent highs. Given the economic uncertainty many are seeing, you may be worrying that the value of your house may soon follow the direction of the S&P 500 this year. One option that allows you to benefit from the current valuation of your home without having to sell, potentially pay taxes on the realized gain, and then find another place to live, is to establish a Home Equity Line of Credit (HELOC), or request a line increase if you already have a HELOC based on an older home value. By obtaining a line of credit established now on the current value, you can increase the amount of borrowing power you can access, should the need arise in the coming years. Many lenders offer HELOCs with no fees to set up and no interest is charged until (or if) you borrow against the line. Having this additional access to liquidity can come in very handy when you need funds and stock and bond markets have not yet recovered.  

Often times we feel paralyzed by market movements and are not sure what to do. Re-evaluating your risk tolerance in the midst of a market decline, and establishing/increasing an emergency line of credit should economic conditions worsen, are two active steps you can take today that can help set you up for a less stressful future. 

Meet Brian Horan, CPWA® »


IMPORTANT DISCLOSURES

West Financial Services, Inc. (“WFS”) offers investment advisory services and is registered with the U.S. Securities and Exchange Commission (“SEC”). SEC registration does not constitute an endorsement of the firm by the SEC nor does it indicate that the firm has attained a particular level of skill or ability. You should carefully read and review all information provided by WFS, including Form ADV Part 1A, Part 2A brochure and all supplements, and Form CRS

Certain information contained herein was derived from third party sources, as indicated, and has not been independently verified. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any information presented. Where such sources include opinions and projections, such opinions and projections should be ascribed only to the applicable third party source and not to WFS.

This information is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept. These materials are not intended as any form of substitute for individualized investment advice. The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own. You should not treat these materials as advice in relation to legal, taxation, or investment matters. Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisers.