For investors, the first half of 2020 was a wild ride. The coronavirus pandemic abruptly halted economic activity, plunged the U.S. into a recession, and left us all swimming through uncertainty—even as the benchmark S&P 500® Index recouped much of its losses by early June.
“We’ve been whipped around so much,” says Gary Schlossberg, Global Strategist for Wells Fargo Investment Institute (WFII). “Spring of 2020, along with the Great Recession, is our second life-changing financial experience in the last 11 years.”
Now on the horizon are reopening, the 2020 election season, and all the additional accompanying uncertainty. “It’s a good time to take a pause, look at where your portfolio stands, and figure out where it needs to go,” Schlossberg says. “Times like this can alter your risk/reward profile.”
Here, he shares his perspective on what investors might consider as the markets and the U.S. attempt to move forward.
Look at your risk tolerance
The S&P 500 fell more than 30% in fewer than 30 days through March 23. The extreme sell-off ended the 11-year U.S. equity bull market, the longest ever. Large market moves like this can drive investors to think about risk tolerance—the amount of risk you’re willing or able to take to help achieve your financial goals.
- What to do now: While the index recovered sharply, approaching previous all-time highs by early June, this could be a good time to reassess your risk tolerance. Did the downturn keep you up at night, or cause emotional moves, such as reducing risk or moving out of the market? If so, it’s probably time to examine the level of risk in your portfolio.
- In the short term: Consider rebalancing back to your long-term target allocation. “It’s hugely important,” Schlossberg says. “Markets kept going up for more than a decade, and it’s easy to be complacent when your statements are all good news. That can throw off your asset allocation.”
- In the long term: Set an appropriate course and stick with it. A diversified portfolio can help you weather market fluctuations so you can stay on track toward your goals. Your plan should be nimble, so consider regular portfolio checkups to reflect and realign with all parts of your financial life.
Revisit your financial goals
Goals change over time. For the most part, you should adjust them to correspond with what you want and the big events in your life, rather than adjusting them to match market fluctuations. After a long bull market and a global pandemic, however, consider whether your current status and future goals might need to be adjusted.
- What to do now: Assess your liquidity. Do you have a solid emergency fund (possibly more than the three to six months of your usual income that’s recommended during normal times) and enough cash if markets take another downswing?
- In the short term: Talk to your family and an investment professional about your goals and where things stand in terms of reaching them. “Ask yourself if you need to make any changes,” Schlossberg says. “Do you want to borrow some money while interest rates are low? Do you need to look for ways to generate more regular income?”
- In the long term: Periodically consider adjusting your goals with an eye on the big picture. Don’t give in to reacting to the news events of the day or one quarterly statement.
Re-measure your time horizon
Your time horizon is the amount of time you expect to hold an investment before you need it, or before you shift it to something else. It may vary across different goals you hope to achieve—such as retirement, your children’s education, a vacation home, or other priorities.
- What to do now: Stay the course if you can. As with your big-picture financial goals, life events and changes should determine your time horizon, not short-term volatility.
- In the short term: If you’re close to retirement, it’s probably a good time to think about how soon retirement may be. Ask yourself and your advisor whether pushing your time frame forward or back makes sense, and whether you’ll need to adjust your vision or your time horizon. Part of answering those questions involves determining whether you have enough allocated to equities to help reach those goals, Schlossberg says.
- In the long term: Keep your focus beyond the present day, no matter how far away the horizon may be. “We all tend to take a shorter view, to see these big swings and take action,” Schlossberg says. “But history tells us it’s been better not to do so.” The best strategy, he believes, is to align your portfolio with your risk tolerance, goals, and time horizon. “Make sure you’re diversified, then rebalance and repeat.”