Source: Wall Street Journal

Chances are your portfolio is taking a beating right now as stock and bond prices fall together for the first time in decades. Yet the best strategy in moments of volatility like this one, financial advisers say, is also one of the least satisfying: Do nothing.

Doing nothing right now is easier said than done, with anxiety rising along with inflation and interest rates, and the global economic uncertainties caused by the war in Ukraine and the third year of the pandemic only growing.

When losses mount, it is human nature to want to do something, behavioral economics has shown. Like King Lear, we tend to assume that “nothing will come of nothing,” even if decades of long-term market returns may show otherwise. But when does it pay to act? When should traditional portfolios be scrapped? Advisers say that whether you should do nothing or something may depend primarily on if you are closer in age to the aging Lear or his daughter Cordelia.

For younger investors, the advice is simple: “Don’t sweat it,” said William Bernstein, an independent financial adviser based in Eastford, Conn. “If stocks tank, that’s good for you since you will be able to buy them more cheaply,” he said. ”If you are young you want the market to tank.”

“Doing nothing is pretty good advice if your time horizon is 10 years or more,” said Elliot Pepper, a financial planner in Baltimore. “Since markets can and will be volatile, always make sure the money you might need in the next six to 12 months isn’t in the stock market—it should be in cash such as a high-yield savings account or in U.S. Treasury bonds, he said.

The best protection from this volatility is to have a long-term financial plan and stick with it, advisers say. Yet even those with a plan may find they can’t tolerate as much volatility as they initially thought. Others may realize they hold a more aggressive portfolio, with a higher allocation to stocks, than they intended, simply because stock prices have risen significantly in recent years.

Paul Auslander, an adviser in Clearwater, Fla., says he has met with prospective clients “who come in thinking they have a 60/40 portfolio only to discover it has drifted to 80% in stocks.”

A monitor on the floor of the New York Stock Exchange. As bonds fall in tandem with stocks, some advisers say the traditional 60/40 stock-and-bond portfolio may need a rethink.PHOTO: SPENCER PLATT/GETTY IMAGES

For older investors, things can be more complicated, and in times like now, “some modifications may be needed,” said Mr. Auslander.

Mr. Bernstein recommends assessing how much stock-market risk you can afford to take.

For example, a 65-year-old with a 25-year life expectancy who spends 2% of his or her $1 million portfolio annually, or $20,000, can afford to invest, and lose, significantly more in stocks than someone who needs a 5% withdrawal, or $50,000 a year.

Anyone needing those larger withdrawals should hold no more than 50% in stocks, advises Mr. Bernstein.

As bonds fall in tandem with stocks, some advisers say the traditional 60/40 stock-and-bond portfolio may need a rethink.

“It sort of dispels the idea that you can effectively hedge with your standard stock-and-bond mix of a portfolio,” said Kevin Gordon, a senior investment research manager at Charles Schwab. “If inflation keeps rising and if economic growth keeps slowing, that means we’re in a countercyclical type of environment for growth and inflation.”

Mr. Gordon suggests rebalancing your retirement portfolio more than just once a year.

“If you’re more of the passive type and you’re not taking a day-to-day approach to investing, the advice there is to not take as much as a calendar-based approach to rebalancing but take more of a volatility-based approach,” he says.

Elliot Dole, an adviser in St. Louis, is shifting some of his clients’ money into alternative investments such as lending funds to “diversify away from reliance upon only stocks and bonds.”

Ann Minnium, a financial planner in Margate City, N.J., likes to see at least 15% to 20% of a retiree’s bond portfolio in inflation-protected bonds and an 8%-to-10% allocation in real-estate investment trusts.

Consider dividend-yielding stocks such as public utilities, Mr. Pepper said. While they are stocks and are subject to price volatility, they also tend to have stable and continuing dividends that can act similarly to the stable and continuing interest payments of bonds in a portfolio, he said.

There are other actions to take that remain in the spirit of doing nothing.

Ann Gugle, a financial planner in Charlotte, N.C., says she is doing more tax planning with clients recently. Like she did in March 2020, she is recommending more Roth conversions and switching more clients’ 401(k) contributions to Roth.

She is also doing more tax-loss harvesting, which helps offset portfolio gains and helps clients who recently sold real estate at high prices. Tax-loss harvesting involves selling some stocks or assets that have fallen in value and using the losses to help offset capital-gains tax liability, reducing one’s overall tax bill.

For instance, Mark Keating, a financial planner in Sebastopol, Calif., says he recently sold a client’s shares of the Vanguard Total Bond Market Index Fund ETF, which is down roughly 10% year to date. In its place he purchased Vanguard California Intermediate-Term Tax-Exempt Fund Admiral Shares.

By doing this he was able to harvest a 10% loss for the client, which will reduce their 2022 taxes. Finding such an upside to losses may also have psychological as well as financial benefits, Nobel laureate and behavioral economics pioneer Richard Thaler said. “Harvesting is such a nice term. Much better than ‘formally accepting the fact that this investment was a mistake,’” he said.