Do you remember July 7, 1986? I don’t. I was probably concerned with three things. Was I going to the beach? Were the Dodger’s winning? Where was I going to eat lunch?
On July 7, 1986, the Dow Jones dropped 3.3%. I’m sure the newspaper headlines were full of doom and gloom. The “experts” were probably pontificating that this was the beginning of the end and that the buy and hold strategy was over forever.
If you were fortunate enough to buy the S&P 500 Index on that horrible day and hold it until the end of February 2020, you made a lot of money. Let’s say you purchased $100,000 worth of the Vanguard S&P 500 Index Fund on July 7, 1986. Your investment is now worth $2.4 million, generating an average annual return was 10.3%, including this week’s stock market thrashing.
I still believe in the buy and hold strategy. When the market comes down, it allows you to invest in great companies at lower prices. It’s like flying. The only way to get on an airplane is when it’s on the ground. If you’re not on that plane when the pilot leaves the gate and roars down the runway, you lose.
However, I realize that not everybody has the confidence or courage to buy during a market meltdown, so here are a few suggestions to help strengthen your portfolio.
- If you need your money in one year or less, do not invest in the stock market, keep your money in cash or short term investments like U.S. Treasury Bills or CD’s.
- If you’re going to retire in five years or less, then I would recommend keeping three years’ worth of expenses in cash, short term CD’s or U.S. Treasuries. For example, if your annual expenses are $100,000, then your cash holdings should be $300,000.
- If you’re in your 20’s or 30’s, I would back up your pick-up truck and buy as much stock as you can to buy great companies at discounted prices.
- If you are concerned about international turmoil, invest in small and mid-cap companies headquartered in the United States. Small companies typically do not have much international exposure.
- Invest in dividend-paying companies. According to YCharts, over 1,588 companies are yielding more than 3%.
- Asset allocation and diversification still work. A balanced portfolio of stocks, bonds, and cash will treat you well over the long term.
- If your timeframe is 3 to 5 years or more, I would recommend holding on to your investments.
The current markets are not fun, but this can be an opportunity for you to reexamine your investment holdings and financial goals to make sure they’re in line with your long-term financial plan.
Be on your guard, stand firm in the faith; be courageous; be strong. ~ 1 Corinthians 16:13.
February 10, 2020.
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.