After a turbulent year in 2022 for the stock AND bond markets, 2023 has seen a modest recovery. Most of the gains occurred in January, were wiped away in February and early March, and then picked up steam again from mid-March until now to get us back to where we were at the beginning of February. That’s how it goes with markets during times of uncertainty. But, if you compare 2023 to 2022 things are relatively quiet. Periods of calm present an opportunity to catch our breath and reassess. We would like to explore what we think are the five potential mistakes that investors can make at a point in time like we are in.
Mistake #1: Losing patience with a flat market
As we mentioned earlier, while the stock market has come back some this year, nearly all investors are still down roughly 10% from where they were at the end of 2021. A full recovery seems to be taking a long time especially when you compare to the Covid drop. That market event took only five months for the stock market to bounce back and it went on to soar 30% higher by the end of 2021! As this recovery/reset drags on, there is a real risk that investors will grow impatient, start making emotional decisions, and chase after returns. None of those tactics actually work as there is no way to predict the direction of markets. Best to stay invested and let time take care of things – always has in the past!
Mistake #2: Not rebalancing your portfolio
According to a Vanguard study, rebalancing a 60% stock/40% bond portfolio annually adds about .26% to your overall return each year. Rebalancing requires discipline as you could actually be selling an asset class that has gone up in value only to buy something that may have gone down. That’s hard to do unless you have a system in place and you are committed to the process. Start with picking a date, say May 1st, and just do it. It’s easier to do with retirement accounts because there are no tax implications shifting your money around inside a 401k or IRA. However, be careful with non-retirement accounts so you don’t realize unintended gains. Remember, previous losses can offset present gain. The goal with rebalancing is to control risk over time.
Mistake #3: Not diversifying your investments
For the past five years US stocks returned 49% – that’s a nearly 10% average return. Foreign stocks on the other hand were down .51% over the same exact time period. So does that mean you should not invest in foreign stocks? However in the past six months foreign stocks are up 21% while US stocks are up nearly 12%. The point we are trying to make is that nobody has a crystal ball. Investors don’t know when the tide is going to turn. But, things don’t usually go on forever. Instead, the key is to maintain a diversity of investment styles so that you exposed to opportunity and protected from danger – neither of which we don’t know when they will hit. We only know that they eventually will!
Mistake #4: Not understanding how your investment decisions flow through to the tax return
Did you know that is you are in a low tax bracket dividends paid by US companies and capital gains may be tax free? Did you know that if you are in any other tax bracket but the highest, dividends paid from US companies and capital gains are taxed at a 15% rate up to 492K of earnings even if someone is paying tax at a 35% rate. That’s why it is usually better to invest in US stocks in non-retirement accounts and park your ordinary dividend payers and international funds in your IRA. Taxes can take a large bite out of your investments if you are not careful about where to invest and how to sell.
Mistake #5: Listening to the media noise
Media outlets make more money the more viewers they are able to lure in. There are no professional qualifications to be a “journalist”. There are no licensing, compliance, and CE requirements to be a member of the media. The point is that why would anyone believe a media pundit ever again? If you allow the media to suck you in, chances for emotional decision making rise exponentially. Now, we’re not saying that there are not good journalists out there – there are! And, we are not suggesting that you shouldn’t pay attention to what’s going on – you should! We are simply suggesting that all the noise that we are bombarded with on television and on-line is not all that helpful for those who invest for the long run. And, if you are not investing for the long haul, why are you even investing at all.