This past December was one for the books — and not in a good way. On Christmas Eve, the S&P 500 index fell by 2.71 percent, making history as the biggest plunge to ever occur on the last trading day before Christmas. Did Santa Claus skip town?
Now, talks of volatility in the stock market, federal interest rate hikes, U.S.-China trade negotiations and the U.S. government partial shutdown mark every headline. With all this noise, how is it possible to stay calm and carry on?
If you are a long-term investor, the solution is exactly that: stay calm and stay the course. Market swings, or “corrections,” are normal and to be expected. If you don’t need to utilize the investment funds you have set aside for an immediate short-term goal, then experts agree that you should still invest in the stock market and avoid trying to “time” the market. Instead of poring over those headlines, you should be focusing on your long-term financial plan and overall financial health. Here’s a few planning tips to help you zero in on the big picture:
1. Determine your financial goals and the purpose behind your investment portfolio: This is the time to really focus on what you want. Do you plan to retire early? Do you dream of a second home or paying off your student debt? Make a list of your financial goals and prioritize them.
2. Make sure your portfolio allocation is appropriate for your desired goals: For example, if you are setting aside funds in order to purchase a home in the next two to three years, then you should be more conservative with regards to your allocation. However, if these funds are being set aside for your retirement and you have 40+ years before you retire, it is considered appropriate to take on more risk for these longer-term goals.
3. Review your risk tolerance and investment policy statement: Remember, accepting some risk is how you can earn returns. Are you taking on more risk than you are comfortable with? A typical 70 percent stock to 30 percent bond portfolio of well-diversified stocks would have taken a roughly 24 percent hit during the financial crisis in 2008. If thinking about that kind of drawdown makes your stomach churn, then maybe it’s time to revisit your risk profile and dial back some of your equity exposure.
4. Start reducing your debt: As tempting as it is to funnel your money into the stock market, financial planners agree that debt repayment should be a priority. The cost of carrying debt can far outweigh your investment returns, especially in a bear market. Grab a pen and paper, list your debts and come up with a plan as to how to tackle them. The best advice is to pay off your higher interest rate debt first.
5. Take a look at your 2018 spending: Call your credit card company and obtain a yearly statement for 2018 or download one from its online platform. Look at your spending as a percentage of your income. Are you spending more than you should be on superfluous items? The general rule of thumb is to strive to save between 10 to 20 percent of your income. Doing so will help grow your net worth and get you closer to your financial goals. Another tip is to have funds equivalent to at least 3 to 6 months’ worth of immediate expenses saved in a liquid “emergency fund” account in case you run into an unforeseen financial bind. Reigning in your spending can help you get one step closer to having this emergency fund in place.
A new year is a great time to get a 30,000-foot view on your long-term financial plan. If you focus on this rather than the short-term volatility in the market, then you will be in the driver’s seat with regards to your life goals. Talk with your investment advisor or financial planner about how you can get your financial plan started. We at Coral Gables Trust Company stand ready to assist you in taking smart steps to get closer to achieving your lifelong goals.
Isabela Sanchez, CFP®, is a Trust Officer and Assistant Vice President at Coral Gables Trust Company.