Volatile markets are scary. In fact, they can be very scary.
None of us, including myself, like it when market volatility picks up. Similarly, none of us, including myself, like it when our account value goes down.
However, despite knowing these realities of investing, we still invest. In doing so, we must remember that market volatility, while uncomfortable, is a consistent and expected byproduct of investing. We assume this undesirable side-effect of investing in an attempt to make money over the long term.
Remember, investing is all about the long term.
Still, even knowing that investing is a long-term strategy, it’s difficult to remove our immediate emotions when we see red numbers flash across the screen. Therefore, even in its long-term nature, it’s important that we take stock of the current market and evaluate our existing portfolios.
In doing so, here are few questions you should consider asking yourself.
Do I Need the Money Now?
Hopefully, the answer is “No”. If you need the money now, you may not want to be invested in the volatile part of the market. Typically, we invest in the volatile part of the market because we do not need all or a large portion of the money right now or in the foreseeable future.
While not needing the money probably gives you little comfort if you see your account value go down, you may be re-assured if you have a higher risk capacity. Your risk capacity means that while you may not like losing money, and you may not want to lose any more, you could have the “capacity” to do so. Your risk capacity means that you may have time to withstand short-term market losses in a guided attempt to reap the benefit of long-term gains.
* A special note for retirees. Yes, losing money is not fun, but remember, you could be only withdrawing a small portion of your total asset base. For this reason, may I suggest that you could also answer this question with a “No”? No, I do not need it all now.
Am I Diversified?
Diversification, Diversification, Diversification! You have likely heard this word many times.
Diversification could be one of the keys to your portfolio’s success in times of market volatility. Diversification means not having all your eggs in one basket. Diversification means having a little bit of this and a little bit of that. Most commonly, it could take the form of a split of stocks and bonds.
Bonds, more recently, have become the ugly stepchild as the pending threat of rising interest rates continues to stir. Many people are asking whether bonds even belong in a portfolio or not (if you have read anything I have written before, then you know that I believe they are still a critical piece of most portfolios).
As evidenced by last week, I think bonds DO belong in most portfolios.
Bonds have done exactly what we would expect them to do. In fact, bonds (as measured by the Barclays Aggregate Index) are up slightly between August 18th and August 21st. During this same period, the US stock market (as measured by the Russell 3000 index) is down more than 6%.
By having bonds in your portfolio, you could potentially dampen the downside loss potential if the stock market heads south.
This is just another quick example of why not having your eggs in one basket may be one of the right choices when it comes to long-term investing.
Have My Long-Term Goals and Objectives Changed?
Good investing and good financial planning are all about setting goals. These goals help guide your decision-making as you progress through your life. Most of these goals are strategic, long-term objectives outlined throughout one’s life.
For many investors, it may be unlikely that your long-term goals and objectives have changed over the past few days. If they have changed, it could be that the change in your goals and objectives stems from an unexpected event.
It’s probably unlikely that your change in goals and objectives stems from a few days of market volatility.
Now is the best time to focus your energy on doing the right things to help achieve your goals and objectives. By taking stock of where you stand in relation to meeting these goals, you can re-focus your energy away from the daily market movements.
Furthermore, I would venture to guess that most of these goals and objectives may be still very much in reach, even after the last few days of volatility.
What Else Should I Consider?
When market volatility increases, it’s normal to experience increased anxiety if you see your account values go down. Now, more than ever, is a critically important time to keep your emotions in check.
One of the biggest mistakes retail investors may make is selling out of fear, anxiety, and uncertainty. Selling when the markets are down is a misguided attempt to protect themselves from more losses. Unfortunately, the unintended consequence of this overreaction might be to amplify these mistakes. In fact, the average investor has earned only 2.3% over the past 20 years, while the S&P 500 has earned 8.2%. It’s during times like these that you should stay focused on your long-term vision, stay focused on the plan, and stay focused on making decisions that actively and prudently help you reach your goals!
Past performance is no guarantee of future results. Diversification does not guarantee a profit or protect against a loss. Barclays Aggregate Bond Index is made up of the Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed Securities Index, and Asset-Based Securities Index, including securities that are of investment grade quality or better, have at least one year to maturity, and have an outstanding par value of at least $100 million. The Russell 3000 Index consists of the 3,000 largest U.S. companies as determined by total market capitalization. It assumes the reinvestment of dividends and capital gains and excludes management fees and expenses. S&P 500 Index is an index of 500 of the largest exchange-traded stocks in the US from a broad range of industries whose collective performance mirrors the overall stock market. Investors cannot invest directly in an index.