How to Navigate a Volatile Market

Market volatility can cause an onslaught of emotions and most of which would not be described as ‘pleasant’. Mostly notable of those emotions are anxiousness, frustration, and even fear… and rightfully so! It would be safe to assume that no one goes out of their way to pursue to these emotions. In fact, we do everything we can to avoid these types of feelings. We’ve written about the power of letting these emotions dictate your investment decisions in another blog post titled, Market Timing.

We are fully aware of how difficult and stubborn the markets have been over the last few years and wanted to provide a few tips that can help you weather the storms of market volatility and minimize the related negative emotional experience.

1. Limit how often you are checking your account values. – Markets can behave irrationally and if you find yourself checking your accounts daily, you will almost always end up with unnecessary frustration. In a previous blog post we wrote about Playing the Odds and how on a day-to-day basis the stock market is positive roughly 53% of the time and negative 47% of the time. However, over longer periods of time, the market returns become more positively skewed in your favor. So, what are we suggesting? Review your statements quarterly but minimize monitoring the daily ups and downs. It is possible you are wearing yourself thin by getting sucked into the ebbs and flows of the market. If your peace of mind/happiness is tied directly to your portfolio value, why would you choose to only be happy 53% of the time?

2. Own investments that benefit from diversification. – According to Nobel Prize laureate Harry Markowitz, modern portfolio theory is a practical method for selecting investments in order to maximize their overall returns within an acceptable level of risk. By allocating across various asset classes, returns can be maximized for a given risk level.  But sometimes the typical diversification either between stocks or across asset classes like bonds, real estate, and cash can still leave you disappointed during a period of high volatility. Investments will go up in value, and investments will go down in value.  But they don’t all go in the same direction at the same time. An informed investor understands that diversification across asset classes can help mitigate the risk when certain securities decline in value because not all securities will go down at the same time.  We design our investment models to benefit from diversification which reduces volatility.

3. Regularly assess your risk tolerance. – We say it all the time here at Sugarloaf Wealth Management: ‘You can never escape the relationship between risk and reward.’ Typically, the greater the risk, the greater the potential for a higher return (and, also, the higher the potential for losing your investment, too). What most research shows is that investors accept more risk during bull markets than they are actually comfortable taking. Most of the time these decisions are driven by the ‘fear of missing out’ and greed. And, usually, all is well until it isn’t. The market is capable of reversing course quickly and investors that are invested outside of their acceptable risk tolerance can pay the ultimate price. Make sure that you are mindful of this when determining your portfolio strategy so that when volatility strikes, you avoid surprises and are comfortable with where you’re positioned. We will assess your risk tolerance at least annually to assure you are appropriately invested, however, if something changes, please contact us and we can help you reassess your risk tolerance.

4. Make a financial plan that factors in volatility. – When building a financial and investment plan it is important to take into consideration ‘sequence of return’ risk. This is the risk that the order and timing of poor investment returns has on your portfolio and financial plan. Assuming a static or exclusively positive return does not capture the full investment cycle and can set an unrealistic expectation. Anticipating these volatile time periods and having a plan to navigate these times is essential in your plan’s long-term success. With proper perspective and planning, you can avoid making decisions that are detrimental to your portfolio’s return. We deliver customized financial planning and wealth management solutions to equip clients with resources and support needed to meet financial goals and objectives.

Take comfort in being an informed investor that has planned for volatility by diversifying investments according to the level of risk vs reward you find acceptable.  We know that these tough and volatile times will not last forever, and we hope you use this guide to help navigate the tumultuous markets. For an additional resource, check out this article written by Fidelity Investments that we found to be helpful.