The stock market has been a powerful wealth generator for millions of Americans. Yet, in times of market volatility like we’ve experienced recently, investors may feel less confident in owning stocks, and some may even be tempted to sell their stock portfolio out of fear of further declines.
This type of thinking poses a risk to meeting your long-term financial goals. To have confidence to stay the course with your personal financial plan, it is necessary to have a proper understanding of the role of stocks in your portfolio: why you own them and what they’re designed to accomplish.
Here are three points to remember.
First, stocks are a long-term investment aimed at meeting spending needs that are several years or more inthe future.
Stocks aren’t owned in your portfolio to meet near-term spending needs, because, as we have experienced recently, stock prices can fall meaningfully over shorter periods of time. Instead, cash and bonds are the best investments for meeting spending needs over the near to intermediate term. Cash holds its value, and bond prices tend to go up and down less than stocks.
Thus, a properly structured portfolio resembles the following, with cash, stocks, and bonds set aside to match the timing of your spending requirements:
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Second,stocks can go down over the short-run, but they have never stayed down. Stocks have rarely lost money over long periods of time such as a decade or more. The reason is simple: given enough time, companies find ways to generate profits, which usually translates into higher stock prices and dividends.
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Third, with a properly structured portfolio, investors can look beyond short-term stock market declines. Knowing that stocks are owned to meet your distant spending needs should allow investors to look past day-to-day, month-to-month, and even year-to-year volatility in the market.
When stocks are down, don’t panic: cash or bonds canbe used to meet today’s spending needs. Based on history, you can have confidence that the stock market will recover in time to meet your long-term spending requirements.
In fact, declines of 30% or more in the Dow Jones Industrial Average such as we recently experienced have tended to be followed by strong returns. We believe the present situation will prove to be no exception, with stocks set to rebound once the crisis phase of the pandemic passes.
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Hefren-Tillotson’s MASTERPLAN® is a comprehensive financial plan that begins with looking at your unique situation and ends with a recommended mix of investments to meet your short-and long-term financial needs. If you already have a MASTERPLAN, it will see you through periods of uncertainty such as today.
If you do not, there is no better time to begin the process than the present! Click here to take the first step and schedule a no-obligation meeting.