Risk on, Risk off
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.
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