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By Jill Nagy
Sit still. Hold tight. Don’t panic. That sums up the advice of some financial advisors to investors feeling a bit seasick in a volatile market.
From 1980 to the late October 2018 market drop, there have been 36 corrections in which the market fell 10 percent or more, said Jeff Vahanian of Vahanian & Associates in Saratoga Springs. In each case, the market recovered and continued moving upward.
The worst thing an investor can do is to sell when the market drops and then miss the upswing that is likely to follow, he said.
Tim Pehl of Luther Forest Wealth Advisors agreed.
“We try to keep our clients on the straight and narrow,” Pehl said. His advice to nervous clients: “Stick to your plan.”
“People with good rules, good discipline, and good habits do well,” noted Vahanian.
There is not much new in the way of new laws and regulations this year, both said. However, Pehl highlighted a possible source of tax savings that, after being temporary, is now permanent: the ability to make charitable contributions from an IRA account, thereby avoiding taxation of the funds.
Where it really comes into play, he said, is with taxpayers unable to itemize deductions under the new tax law. “This is one of the biggest pieces of advice that we are giving out this year,” he said.
Pehl was skeptical about some New York state innovations intended to ease the effect of new ceilings on the deduction of local taxes. New York state allows employees to reduce their payroll and withholding and receive a tax credit in exchange. There is also the scheme to allow taxpayers to make charitable contributions to local taxing authorities instead of paying taxes. In both cases, the IRS opposes the scheme.
“I’m not sure exactly where it stands,” he said of the payroll-reduction scheme. “You don’t want to be a guinea pig on this. Wait until the dust settles.”
On the whole, Pehl is upbeat about the effect of the new federal tax laws. He thinks most people will find their taxes reduced. That was what they found when they did tax analyses for most of their clients after calculating 2017 taxes. A big advantage for many taxpayers is that “the alternate minimum tax was pretty much wiped out,” he said.
While urging steadiness, Vahanian acknowledges that it is a “great challenge” for him to get clients to focus on the long term during this time of political divisiveness, social unrest, and global trade tensions.
“In the short term, the market is a voting machine,” he said, “In the long term, the stock market is a weighing machine, weighing the value of a company.”
As a corollary to advice to try to ride out the ups and downs of the market, Vahanian advised people not to put money into the stock market that they will need in the short term.
While the timeworn advice to diversify and not put all of one’s money into stocks is still good, both Pehl and Vahanian acknowledged that alternatives that yield good income are limited. Pehl thought that short-term bonds could make sense as interest rates increase. Vahanian pointed to real estate as another investment vehicle that can protect buying power.
Most portfolios recovered from the 2008-09 recession, Pehl said he expects them to recover from the recent downfall as well.