Short-term Market Downturns Can Be Great Opportunities

Early August saw a major decline in the stock market that initially caused great concern — only to be eclipsed a few days later with the largest one-day gains seen since 2022. Financial advisors told Arkansas Money & Politics they have worked hard to educate their clients to hold on through tumultuous times which may even create
opportunities.

Actually, short-term downturns can be great opportunities, so paying attention is always good,” said Scott Daniel, a partner at WealthPath Investment Advisors in Little Rock. “Staying focused on the overall game plan is crucial, and being long term and able to make adjustments can be very fruitful. Staying within your game plan will hopefully deliver the results needed for the long term.”

Scott Daniel

The long view this year is that the Dow Jones Industrial Average, the S&P 500, and Nasdaq are up and seem on track for a very good year. However, Daniel said he sees some areas of potential weakness that could affect the market volatility.

Daniel said they did not have many clients concerned on Aug. 1, when the Dow fell 1,000 points and overall markets saw a decline of 3 percent. He attributed that to great discussions early on to educate clients about market ebbs and flows. Plus, his company reaches out to clients when opportunities arise or when adjustments need to be made.

Creating and sticking to an overall investment strategy is vital to long-term success, he added.

“Create a game plan now that can be adjusted at a moment’s notice,” Daniel said. “You’ll be glad you did.”

Despite the rocky start, as of mid-August, the S&P 500 was up 16 percent year to date and up 186 percent over the past 10 years. Dale Colclasure Jr., president of wealth management services at RetirePath in Little Rock, said one’s personal yield could be significantly greater for those who have been dollar cost average investing as an accumulator, or it could be much lower for those who have been withdrawing money on a regular basis for income.

Dale Colclasure Jr.

Resources are now available online to manage one’s own investment plans, including using artificial intelligence to make choices, but many people simply do not have enough knowledge to get the best returns.

As a [certified financial planner] practitioner and fiduciary, I honestly believe that every client’s experience should be guided by their knowledge of what they need to achieve from the markets,” Colclasure said. “My firm, RetirePath, only works with clients through a personalized, comprehensive, holistic financial plan where you know what your actual goals are and have a guide as to how you will achieve those goals.”

Short-term downturns are an unavoidable reality when it comes to investing. Colclasure said it is important to understand that volatility — positive as well as negative — helps investors achieve greater returns in their portfolios during accumulation years, but negative volatility during distribution years can be damaging to one’s long-term ability to generate necessary income to offset inflation.

“There is a real need for an honest conversation for how investment portfolios should begin to change as you enter the ‘retirement red zone,’ which is the five years before projected retirement and the five years after you actually retire,” Colclasure said. “You will stop accumulating, contributing for growth, and begin distributing, withdrawing for income. In the distribution phase, you must ensure that you have an investment structure that will provide you and your loved ones with a predictable income stream for 20, 30 or even 40 years.”

Colclasure said research shows that the average person bases almost all financial decisions on fear or greed. He said he believes partnering with a fiduciary advisor can aid in making more rational decisions.

“Having a personalized, comprehensive plan, consistently updated based on changes in the tax law, changes in the economy, changes in your life and changes in your goals, will result in greater outcomes and a greater sense of security,” Colclasure said.

There is never a bad time to evaluate one’s overall investment strategy, said Matthew Jones, president of Legacy Capital, which has offices in Little Rock and Rogers. What is most important is for each investor to have a long-term game plan that serves as a roadmap to where they are and where they are trying to go. Then the investment strategy should be designed to give them the highest probability of achieving their goals, he said.

Matt Jones

This type of long-term planning makes it much easier to put short-term volatility and market pullbacks in a proper perspective,” Jones said. “The simple fact of the matter is that if you have a good plan in place, the market dropping 10, 15 or even 20 percent, like it did in 2020 and 2022, is unlikely to have much of an impact on your longer-term goals as the markets have always recovered their losses and, most of the time, in a year or less.”

Jones had only two clients call about the most recent market volatility. With the perspective of working in the financial field for 30 years, Jones’ view is what was experienced recently was pretty mild.

“We spend a lot of time educating our clients that volatility is to be expected so they are not surprised when it happens,” Jones said. “We also integrate asset classes, including private equity, private debt and hedge funds, that are not highly correlated with the equity markets and typically have much lower volatility. This helps mitigate the amount of decline in their portfolios when the equity markets pull back.”

In 2022, when the bond market was down 15 percent, the S&P was down about 19 percent and the Nasdaq was off 29 percent, most clients’ private market holdings produced positive returns.

“This helped our clients’ portfolio perform substantially better than the public equity and debt markets,” Jones said.

Jones said he doubts many people have the time or the capacity to devote themselves to being educated enough to truly invest on their own. It is not that people are not smart enough, he said, but that most clients have jobs, families and hobbies. They are better off engaging with a financial advisor who is educated in those areas and practices in them every day.

“To provide comprehensive financial advice, you really need to have deep knowledge in a lot of areas, including financial planning, estate planning, tax planning, insurance planning and investment management,” Jones said. “In my opinion, most of the top financial advisors in our industry are well versed in all these areas and do far more for their clients than just tell them what percent they should have in stocks versus bonds and what funds, stocks or managers to use. Additionally, the top advisors have also invested the extra time to get advanced degrees and/or professional designations.”

Common certifications to look for include certified financial planner, or CFP, certified financial advisor, or CFA, Juris Doctor, or JD, and certified public accountant, or CPA.

Dawn Powell, founder of Paramount Financial in Little Rock, advised against emotional reactions to short-term market movements that might result in buying high and selling low.

Dawn Powell

Sticking to a well thought out investment strategy can help you avoid these pitfalls,” Powell said. “Diversification and a well-constructed portfolio can help mitigate the impact of short-term market downturns. Regularly reviewing and adjusting your investments based on your long-term goals and risk tolerance is often beneficial.”

Powell said it is important to stay informed and review one’s investment strategy periodically, but reacting impulsively to short-term market changes can be counterproductive. Those who are unsure about how to handle market volatility can consult with a financial advisor, who can provide personalized guidance.

Historically, the stock market has generally trended upward over the long term despite experiencing short-term fluctuations. Powell said as of mid-2024, many markets have indeed shown significant gains driven by various factors, such as economic recovery, technological advancements or corporate earnings reports.

“The performance of stock indexes like the S&P 500, Nasdaq or Dow Jones can give a sense of overall market health,” she said. “For the most current performance metrics, it’s a good idea to check recent financial news or market reports.”

Over the long term, stock markets, particularly major indexes like the S&P 500, have generally increased in value. Powell said that growth is partly due to a combination of economic expansion, innovation and corporate earnings growth.

Powell also recommended compounding returns, in which gains are reinvested to generate additional returns. The compounding effect can significantly enhance the growth of investments over time.

She also cautioned to consider inflation. While nominal returns may look impressive, real returns, when adjusted for inflation, give a clearer picture of investment growth.

“Historically, stock markets have provided returns that outpace inflation, contributing to real wealth accumulation,” Powell said. “Investors who diversify their portfolios and manage risk effectively tend to benefit from long-term market growth. Diversification helps mitigate the impact of downturns in any single sector or asset class, and while past performance is not a guarantee of future results, understanding these long-term trends can help you maintain perspective on short-term fluctuations and stay focused on your investment goals.”

Powell advised the following steps:

• Review goals and time horizon: Ensure investments align with financial objectives and investment timeline.

• Evaluate asset allocation: Check if asset allocation is still appropriate given current market conditions and one’s risk tolerance.

• Assess performance: Analyze how investments have performed relative to expectations and benchmarks.

• Consult a financial advisor: For those who are unsure about making changes or need personalized advice, consulting with a financial advisor can provide valuable insights and recommendations.

“Regularly reviewing and adjusting your investment strategy helps ensure that it continues to meet your financial goals and adapt to changing market conditions,” Powell said. “Using a financial advisor can offer several advantages over managing financial planning on your own. Financial advisors have specialized knowledge in areas like investment strategies, taxes, retirement planning and estate preparation. They bring years of experience managing a variety of financial situations, which can help in crafting and adjusting strategies that align with your goals.”

Another advantage she sees is that advisors can provide an objective perspective that helps investors make rational decisions rather than emotional ones, especially during market volatility. Advisors can help investors stay disciplined and avoid impulsive decisions that might negatively impact their long-term financial health.

“Advisors often take a comprehensive approach to financial planning, integrating various aspects like budgeting, investment management, tax strategies and retirement planning,” Powell said. “They tailor financial plans to your specific needs, goals and risk tolerance, ensuring that your strategy is personalized. Advisors can help you build a diversified portfolio to manage risk and improve potential returns. They assess and manage risks associated with investments and other financial decisions, potentially protecting you from significant losses. Financial advisors handle the research, analysis and monitoring of investments and market trends, saving you time and effort.”