Although the market has been on a tear, with the Standard and Poors 500 index clocking 18% year-to-date, it has also been a turbulent market rocked by uncertainty over interest rates, emerging market growth and more recently by the conflict in Syria. A careful review of your portfolio and risk tolerance can help you keep panic at bay when the markets turn choppy.
Most stock market investors are looking for the same result: strong and steady gains of their investments. Dealing with a period of sustained falling stock prices is not easy. All too often, investors react to a sharp drop in prices by panic-selling or digging in their heels despite deteriorating fundamentals. More thoughtful investors see a correction or downturn as an opportunity to review the risks in their portfolios and make adjustments where necessary.
When confronted with any adverse market event — whether it is a one-day blip, a more lengthy market correction (a decline of between 10% to 20%), or a prolonged bear market (a decline of more than 20%) — take time to review your portfolio. Dealing with volatility can be difficult. Here are some suggestions to help you and your portfolio survive market turbulence.
Tip 1: Keep a long-term perspective. The only certainty about the stock market is this: It will always experience ups and downs. The market reacts to news, and news by its nature is unpredictable. That is why it is important to keep emotions in check and stay focused on your financial goals. A globally diversified strategy — making a broad investment and then holding on to it despite short-term market moves — can help.
The opposite of a diversified strategy is market timing — buying and selling investments based on what you think the market will do next. Market timing, as most investment professionals will tell you, is risky. No one has a crystal ball— even the “gurus.”
It is jokingly said that “The Hall of Fame for market timers is an empty room.” If your predictions are wrong, you could invest when the market is on its way down or sell when it is on its way up. In other words, you risk locking in a loss or missing the market’s best days.
Tip 2: Maintain your balance. Over time, your asset allocation is likely to shift as your assets appreciate and depreciate.¹ Rebalance regularly to help ensure your assets are properly allocated. Rebalancing can also help to enhance returns. In any investment you want to “buy low and sell high.” Rebalancing does this automatically by regularly selling portions of asset classes that have done well (locking in the gains) and putting the proceeds into asset classes that have good potential for growth (buying at a bargain). It can be beneficial to periodically reexamine your risk tolerance. Has anything changed in your life that has made you more or less risk-averse?
Tip 3: Talk with a professional. A Certified Financial Planner™ can help you separate emotionally driven decisions from those based on your goals, time horizon, and risk tolerance. Researchers in the field of behavioral finance have found that emotions often lead investors to read too much into recent events even though those events may not reflect long-term realities. The media have become very skilled at stoking fear and greed, encouraging and magnifying herd behavior. With the aid of a financial professional, you can sort through the myths and truths. You will likely find that if your investment strategy made sense before the crisis, it will still make sense afterward.
It is important to remember that periods of falling prices are a natural part of investing in the stock market. Short-term fluctuations are the price you pay for good long-term returns. Perhaps the best move you can make is to reevaluate your overall risk position and then stick to your plan.
¹ Asset allocation does not ensure a profit or protect against a loss.
The opinions expressed above are solely those of Kondo Wealth Advisors, LLC, a Registered Investment Advisor in the state of California. Neither Kondo Wealth Advisors, LLC nor its representatives provide legal, tax or accounting advice.