Dealing with the drop in account values

Over the past few months, most investors’ account balances have seen a steady drop in value. Understanding and dealing with this decrease is important to your long-term comfort and overall wealth plan.

To put things in perspective, in March 2020 when the pandemic became a worldwide issue, the markets declined more significantly than we’ve recently experienced in a variety of asset types.

The difference between that decline and the current situation is that most investment values recovered within weeks after that March 2020 drop. With the current decline, it has been months of steadily lower account values — yet many asset classes still have not reached the extent of the March 2020 drop.

Even so, the current situation may be more unsettling to investors looking at their statements than during that decline 26 months ago.

Two years ago it was like getting a Band-Aid ripped off, and within weeks the markets and account values had stabilized for the most part. Currently it may feel more painful to see account values experiencing an ongoing decline over several months and not knowing if it will take months or years to recover.

These types of markets can raise investors’ concerns and anxiety. Learning how to deal with market drops and account values decreasing is important for an investor’s mindset.

Understanding your timeline

Having a realistic timeline for your investment expectations will help lessen the emotional roller coaster ride when dealing with the steady declines.

If your timeline is longer-term — five years and beyond — and you have adequate liquidity and cash flow to meet your monthly expenses along with any larger expenditures, this will help you manage the current declines.

Having these pieces allocated appropriately also will help to keep your situation on the proper long-term path.

Any investments or assets earmarked for shorter-term needs should be allocated into liquid type assets that could be available as needed but will have less return potential and less volatility.

Proper diversification

To help investors get through volatile times, it is important to have a diversified portfolio consisting of a variety of assets and a long-term plan that matches their needs for cash flow and liquidity over the next several years.

Having plenty of cash available at any given time will help alleviate the anxiety these market drops can cause.

Proper diversification means owning a wide variety of assets, and what may have been successful or performed well in the past may not be as beneficial to own going forward.

Understanding the current market environment along with the inflationary pressures will be an important piece in allocation.

Liquidity, cash balances in the bank

Whether or not a person is retired, it is prudent to have adequate liquidity/cash balances available to handle any unforeseen expenditures or monthly expenses.

I like to use the analogy of a shock absorber for clients when suggesting cash balances in their bank accounts. Receiving several months of statements in which account values have declined will never be enjoyable, but remembering they have an adequate amount liquidity in the bank will hopefully help absorb part of that concern.

Having an income plan to manage your expenses and expenditures

People typically have a variety of income sources, which will be different whether they are retired or still working.

Investors who still are working and contributing to their retirement plans need to remember they are “buyers” of their plan assets on a monthly basis, so market declines do allow a dollar-cost averaging approach when accumulating retirement assets.

Depending on an investor’s retirement timeline, they will need to have a properly diversified portfolio that will be available to provide the necessary income at some point in the future.

Retired investors may have a variety of income sources, including Social Security and pensions, in addition to any income or withdrawals from their investments. Having a realistic withdrawal rate from a portfolio will help ensure the overall longevity of an investor’s plan.

When building a long-term plan, it’s also important to understand the difference between withdrawal rate and income generated from an investment portfolio.

If you are currently taking withdrawals or income from your investments, it is important to identify the percentage of disbursements, including any taxable portions, you are receiving to ensure the long-term health of your overall plan.

The appropriate withdrawal rate changes depending on the age of the person based off their long-term needs.

Having adequate liquidity can help avoid situations when assets need to be sold in depressed markets, which can be less than efficient and possibly impact the overall financial health of your plan.

Understanding permanent versus temporary losses

It is human nature to watch the daily and monthly fluctuation of your account statements, and it is easy to get caught up in the overall decline of your investments.

It is never enjoyable to see your account values steadily decline over time, but is important to understand the difference between a loss on paper and a permanent loss when managing your long-term plan.

Keeping the long-term in perspective and having a wealth plan in place can help investors get through uncertain times.

Having the ability to track your long-term plan and to see that it has not been compromised even during times when account values have dropped will help with the emotional roller coaster these markets have put a lot of people on.

This article is provided by Pete Alepra, a financial adviser at RBC Wealth Management in Cedar Rapids; [email protected]. The opinions in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. RBC Wealth Management is a division of RBC Capital Markets, a member of NYSE, FINRA and SIPC. RBC Wealth Management does not provide tax or legal advice. All decisions regarding the tax or legal implications of your investments should be made in consultation with your independent tax or legal adviser.