Expecting the Unexpected
March 2, 2018 § Leave a comment
After an unusually calm 2017, volatility has returned to the stock market and it’s expected to stay. If riding the roller coaster of the stock market makes you nauseous, here’s a couple things to keep in mind.
- Market volatility and market corrections are normal. The unprecedented stability & run we saw in the market from mid-November 2016 thru January 2018, while nice, was highly unusual. In fact, from 1980 – 2017, the average intra-year decline in the S&P 500 was 13%.1
When the market is volatile, it may be best to resist the urge to frequently check your portfolio’s performance. Seeing daily performance can lead to rash decisions, that could end up hurting your portfolio in the long run. Remember, performance should be measured over longer periods of time. You may, instead, want to focus on reviewing your investment objections, asset allocation (further described below), and your long-term goals.
- The media loves to sensationalize market corrections. Headlines screaming “Dow Plunges 1,175 Points” garner more attention than headlines announcing that “S&P Slides 4% During Normal and Overdue Correction.” It is important to look past the headlines and try to see what actual data is being reported.
If you have questions about the headlines and reports in the media, don’t hesitate to reach out to your financial advisor. They should be more than happy to help you understand the data behind the headlines, and more importantly, how your portfolio and financial plan, are or could be, affected.
It’s also important to note, that the same can be said when looking at your own portfolio. Focus on the percentages and benchmarks as opposed to the dollar figure. A $25,000 decrease may seem like a lot, but it would only be a 5% decrease on a $500,000 portfolio.
- There are several investing principals that, by their very nature, help take some of the edge off volatile markets. Whether you realize it or not, these investment principals are likely already in play in your portfolio. The trick is to make sure they’re at play at a level of risk that you’re comfortable with.
Diversification: The whole purpose of diversification is to help reduce risk and the majority of financial advisors preach its importance. Having a diversified portfolio among different companies and asset classes should help lessen your portfolio’s exposure to any one company or asset class and smooth out performance.
Asset Allocation: Allocating your investments between stocks and fixed income (bonds and cash) is a way to help balance risk. Most people aren’t invested in a 100% stock portfolio as they aren’t comfortable with that amount of risk. However, whatever your allocation is, it’s important that you are comfortable with the amount of risk your allocation correlates to. Since stock market drops of 10% are not an unusual occurrence, someone who has a portfolio allocation of 80% stocks and 20% fixed income, should be comfortable with and expect to experience drops of 8% (stock exposure of 80% times 10% market drop) in their portfolio. If you’re not comfortable with the level of risk your portfolio is taking, you may need to reevaluate your asset allocation.
Dollar Cost Averaging: If you are making regular, reoccurring contributions to your investment portfolio, you are dollar cost averaging. Dips in the market are great for people who dollar cost average as it allows your contributions to purchase more shares when the market/prices are lower.
While expecting volatility, seeing past the noise, and having an investment approach and plan that you’re comfortable with can’t prevent market volatility, it can help make the wild ride of the stock market easier to stomach.
As you can see, there are several reasons why it’s important to take a step back during market volatility and really evaluate the big picture before making changes to your long-term plans. If you’d like to discuss the recent return of volatility to the stock market or any other personal financial planning questions you have, please reach out. I’d be happy to meet with you.
This material has been prepared for informational and education purposes only, and is not intended to provide, and should not be relied on for, investment advice.
Advisory Services offered through Wealth Advisors of Iowa, LLC, a State of Iowa Registered Investment Advisor, and an affiliate of McGowen, Hurst, Clark & Smith, P.C. Certified Public Accountants and Business Advisors