As stocks plunge, should you overhaul your financial plan?
NEW YORK – Stocks are spiraling lower again, bonds are losing money and everything suddenly feels very shaky. Time to overhaul your financial plan, right?
Financial advisers hope your answer is an emphatic "no." Ideally, you already set up your plan with the understanding that something as common as a 10 percent tumble in stocks would occur again and again. But at the very least, the recent turmoil offers a good marker to reassess where things are, and where you want to be.
Conditions have certainly changed from the smooth run of past years, when stock funds were returning double digits with few hiccups. In the last month alone, S&P 500 index funds have dropped close to 10 percent. Bond funds are supposed to be the safe part of a portfolio, but even many of them have lost ground this year.
Investors are ringing the phones much more than usual at Inspired Financial, a financial-planning and investment-management firm in Huntington Beach, California. But the voices from clients aren't in a panic, said Evelyn Zohlen, the company's founder and the incoming president of the Financial Planning Association.
"They're pragmatic," Zohlen said of the callers. "They're asking if there's anything unusual about this drop and whether they should be doing anything different."
Some things that she and other financial advisers suggest to keep in mind:
THIS IS WHAT STOCKS DO
The stock market has offered the best long-term returns historically, but they've come at a price. Stocks can drop suddenly, sometimes for inexplicable reasons.
Drops of 10 percent are common enough, even when the market is largely on the upswing, that Wall Street has a term for them: "corrections." Since the summer of 2015, the S&P 500 has had three such declines, and the index is narrowly close to a fourth. The S&P 500 is down 9.9 percent since setting its record last month.
That latest trigger for market turbulence was a news report on Monday that President Donald Trump may intensify the U.S. trade war with China by announcing tariffs on all its remaining imports. It sent the stock market in reverse, and the S&P 500 flipped from a gain of as much as 1.8 percent in the morning to a loss of 0.7 percent by the end of the day. The report is the latest addition to the pile of worries weighing on stocks in recent weeks, including higher interest rates and the threat of a coming slowdown in corporate profit growth.
AN INVESTMENT MIX TO MATCH YOUR SAVING GOALS.
If you're saving money for a retirement that's 10, 20 or 30 years away, financial advisers ask that you ignore the market turmoil and remember that you're in it for the long term. Selling stocks now would only lock in the losses.
Drops like this make the stomach churn, but stocks have eventually come back from every one of their past declines to set more records. A $10,000 investment made 20 years ago in what is now the largest stock fund has turned into roughly $40,000. That span includes two of the biggest implosions for the stock market: the 2000 dot-com bubble bursting and the 2008 financial crisis.
But if you're saving to pay your kid's tuition in the next couple years, or even to pay next month's credit-card bill, the money should be in something far more stable than stocks. Bonds generally have steadier returns than stocks, though many have had losses this year as a result of rising interest rates.
Savings accounts or bank CDs are even safer for money that will be needed in the very short term.
CONTROL WHAT YOU CAN
No one can predict for sure where stocks and bonds will go next, let alone dictate it.
So try to keep costs down. It's one of the few actions people can control on their own. Funds with low fees tend to have some of the best success rates because higher-cost funds have to perform that much better just to match their performance.
Thankfully, the investment industry is in the midst of a fierce pricing war to lure customers. Fund companies have been slashing fees on mutual funds and exchange-traded funds, and Fidelity recently introduced mutual funds that have zero management expenses, for example.
SOME HELP FOR SAVERS
The upside of rising interest rates is that savers are finally able to earn more, if just a bit.
One-year CDs offered online are paying rates that are above the rate of inflation, which was 2.3 percent last month. Some money-market and savings accounts available online also are getting closer to the rate of inflation, and they allow more freedom to take out money than CDs.
The downside of rising rates is that debt is getting more expensive. Credit-card rates are rising, for example. Higher mortgage rates, meanwhile, are weighing on home prices, which raises worries for people who had been banking on selling their homes to pay for their retirements.
Another area where Zohlen has seen some clients feel pressure is through their home equity lines of credit. "They had been basking for years in incredibly low HELOC rates and have been chipping away interest-only because they were only paying 3.5 or 3.75 percent interest," she said. "All of a sudden, we're looking at 5.5 or 6 percent, and we're starting to see some pain."