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