Are You Prepared for An Eventual Market Recovery?
After almost two years of bear market declines, you’ve undoubtedly had some disappointments in your portfolio. Whilst we don’t know which way the stock market will move short term, we know that investors who continued to follow their long-term plans throughout past downturns were usually rewarded when markets rebounded. We believe the same will be the case in the future. However, you should consider taking some action today to help prepare your portfolio for a market rebound and ensure it’s still designed to help you achieve your long-term goals.
Assess Your Income Requirements
Whether you’re saving for or living in retirement, we recommend reviewing your sources of income and your current spending. You may determine you need to spend less and invest more to achieve your financial goals within the time you desire.
Your income may have declined due to low short-term interest rates or dividend cuts. To help raise the expected income from your investments over time, consider adding shares in dividend-paying companies that are expected to raise their dividends during the next five years. You may wish to add quality corporate bonds as well, as their rates continue to be high compared with those of gilts. If you don’t need current income, reinvest the proceeds, as historically this has made large contributions to attractive returns. Consider adding mutual funds (unit trusts) that own both dividend-paying shares and corporate bonds.
Evaluate your spending as well as your sources of income. Sometimes you can achieve the most impact by reducing your expenses and adding to your investments. Not everyone needs to make changes, but if you do, there’s an advantage in acting today. Your Edward Jones financial adviser can work with you to assess your current situation and develop a strategy to help you achieve your long-term financial goals.
Prepare for an Eventual Market Recovery
Investors frequently make the mistake of preparing their portfolios based on what’s just happened rather than the future. No one knows whether the stock market will rise or decline short term, but historically shares have provided higher returns than fixed-income investments or cash during time periods of 10 years or more.
In our view, it appears now may be an excellent opportunity to add equity investments (individual shares and the mutual funds that own them). During the past 10 years, equity returns were unusually low, just 1.2% per year. Historically, those who invested in equities during the 10 years following low-return decades received above-average returns. The average of the previous five periods was 14% per annum.
Decades with Annualised Returns of 3% or Less
| Decades of Poor Performance | Annual Average Return | 10 Years Following | Annual Average Return |
| 1922–32 | 3.0% | 1932–42 | 9.2% |
| 1928–38 | 0.9% | 1938–48 | 10.7% |
| 1929–39 | 1.9% | 1939–49 | 8.9% |
| 1930–40 | 2.9% | 1940–50 | 10.9% |
| 1964–74 | 0.9% | 1974–84 | 31.7% |
| 1998–2008 | 1.2% | TBD | TBD |
| Source: FTSE All-Share since 1919, Bloomberg, Edward Jones calculations. The FTSE All-Share is an unmanaged index and cannot be invested in directly. Past performance is not an indication of future results. | |||
As a result, we believe most investors should consider increasing their equity investments to help achieve their long-term goals.
Capitalise on Losses
The severe stock market downturn means you may own investments that have declined in value outside your pension pot. Consider selling these investments to trigger a capital loss. You may be able to use those losses for offset against current-year capital gains or carry them forward for offset against future gains. In addition, remember that the capital gains tax allowance allows you to make profits of up to £9,600 per annum without paying tax when selling investments. Before acting, consult your tax adviser.
Selling investments that have declined allows you to use the proceeds to rebalance and improve the quality of your portfolio, if needed. Your financial adviser can help you identify appropriate investments for the proceeds.
Rebalance International Investments
The value of the pound has declined compared to most foreign currencies, which has raised the value of your foreign investments. As a result, your portfolio may have more international exposure than you intended. Any rebound in the pound would, in contrast, lower the value of your foreign investments.
Based on the greater risk of a rising pound, and particularly a possible rebound in concert with the eventual strengthening in the UK economy and market, we have reduced our recommended international allocation to 15% to 25% of your portfolio. We still believe international investments play an important role, as they offer the advantages of improved diversification and exposure to faster-growing countries and industries.
Take Action Today
Today we see several short-term opportunities that may enhance your long-term investment strategy. Request a complete portfolio review from your Edward Jones financial adviser. As part of that review, you’ll work with your adviser to:
- Add equities if appropriate to prepare for market recovery
- Determine whether your portfolio could provide you with more income
- Consider reducing your spending to raise the amount you can invest
- Sell to crystallise capital losses, if appropriate, and rebalance with the proceeds
- Evaluate your international investments
We believe these are important steps to take today to help ensure you’re on track towards achieving your long-term financial goals.
Kate Warne, Ph.D., CFA
Market Strategist
