Sedona Arizona

Adjusting to market volatility


2022 has been a volatile year for stocks, bonds, and cash. It’s unusual from a historic perspective to see all three deeply in negative territory at the same time. Yet, here we are adjusting to downside market volatility across the board.

One could argue markets have been volatile since mid-2018… recency bias will point to selloff in March of 2020. What about the fact that from April 2020 until almost the end of 2021 almost every asset class went for a moonshot? That was upside volatility, as now all those shooting stars are falling back to Earth.

Source: Charles Schwab, Bloomberg data as of 5/20/2022.
Stock market represented on log scale indexed to 100 on Dec 31, 1969. Past performance is no guarantee of future results.

Periods of market volatility can be stressful. Your brain will seek out confirmation that something is wrong with your portfolio. This is especially true when it seems your portfolio balance keeps getting lower.

In these times it might seem natural to do something to prevent losing more money. Investors start looking to assets like precious metals, or to more complex products that may feature upside caps and downside buffers.

When things get volatile investors may take on a short-term view and be easily swayed into products that appear to relieve fears, but jeopardize other long-term factors like liquidity and investment time frame. On the other side, tactical rebalancing can be helpful, yet selling into volatility can be harmful to our intended financial outcomes.

How do we successfully adjust to market volatility and maintain an investment discipline when never know what the market is going to do in the short-term?

How should you respond when market volatility is high?

Here are a few factors to consider before making quick decisions for your portfolio:

To what and whom are you paying attention?

Market volatility is often exacerbated by media exposure. You may even hear friends and family talking more about the market than usual. As a result, it may feel natural to frequently check your portfolio performance.

Daily market movements are reported as the number of points up or down –rather than by percentage. As you might guess, bigger numbers get more attention. Talking about swing of 200 points is more exciting than talking about a swing of 2%.

A temporary decline in value is not the same as losing money.

Though our portfolio values move up and down, we never actually realize a loss or gain until we sell. The logic of this statement works until you hear the words “market sell-off.” While these words can leave you uneasy about your financial future, panic selling in hopes of avoiding a loss can be harmful to your wealth.

Does your allocation match your risk number and financial objectives?

Your risk number, objectives, and timeframe are the foundation of your investment strategy. When choosing investments, look for a track record of solid earnings, profits, and shareholder value. This approach is the difference between investing and “betting” on potential “winners”. Diversifying investments can help reduce volatility so your portfolio doesn’t move as fast as the markets.

Next, choose the most appropriate benchmark for comparison. For example, the Dow Jones Industrial Average, S&P 500, or NASDAQ indexes are not good comparisons for a diversified portfolio.

Revisit your financial planning objectives.

Whether the market is up or down, what matters most is how your financial objectives may change as a result. Ongoing financial planning helps you make sound, long-term decisions over panicked short-term reactions.

Investment decisions are always better made when rational rather than when emotional. THAT is the most tested skill of wise investors. Your investment strategy should match your specific financial objectives.

Want to know if your investments are still on track? Click here to schedule a complimentary portfolio review.

Life Moves Wealth Management is a registered investment advisor offering advisory services in the States of Arizona and Indiana, and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. Information contained on this site should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.

The information on this site is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This information should not be relied upon as the sole factor in an investment making decision. Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made will be profitable or equal any performance noted on this site.  

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Author: Dale Shafer II, CFP®, APMA®, CDFA®

The National Association of Personal Financial Advisors
The Society of Advice

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