Does market volatility affect my strategy?

You have probably noticed this week that we are encountering some volatility in the stock and bond markets.  This is the second time this year.  While it may be causing you some anxiety, we hope that in times like these you will know the benefits of working with a financial adviser who really knows you and your goals.

When we brought you on as a client, we spent a lot of time thinking through your goals and circumstances.  We built investment portfolios for you that match your objectives and tolerance for risk.

As humans, we are wired to ask ourselves the following question when markets go down:

“I have noticed the market is volatile.  Should I sell out and go to cash?”

Everyone we know, including ourselves, has asked this question of themselves at different times in their life.  It’s common sense!

However, what we need to be asking ourselves, instead, is:

“Am I invested according to my goals?”

When we worked with you to devise and implement your investment strategy, we gave careful consideration to your goals and objectives, your time horizon for the investment you were making, and your risk tolerance.  Unless something has changed in one of those factors, the volatility in the market should not be a reason to change your investment strategy now.  If anything, it may be a good reason to put more money in your portfolios.  The portfolio and investments that will help you meet your objectives can be bought at a discount right now.  Buying when prices are low is a great idea!

That said, you may be worried when your account balance has gone down in recent days.  Here is some reassurance for you:

If you are invested for growth:

1. Your time horizon is long.
2. Your risk tolerance is relatively high.
3. You are willing to withstand some dips to meet your long-term goal of growth.

Long-term growth can’t be achieved without risk.  If it could, everyone would just do that and there would be no meaningful market for equities. If you are invested in equities, it is because at the time of the investment, your plan to liquidate the account and use the money was far in the future.  The goal of long-term growth that outpaces inflation can only be accomplished by putting some money at risk and being patient.  The patience part is where we are now. In February, we said that our expectations for this year were growth of 3% in the equity markets.  We saw it dip significantly in the first quarter, come back strong in the end of the third quarter and beginning of the fourth, and now the year-to-date gains have been erased.  None of this volatility is particularly meaningful for money with a 10+ year time horizon.  If you are invested for growth, and your objective and time horizon have not changed, we recommend staying the course.

If you are invested for income:

1. Your time horizon is shorter—you are currently using the income generated or you have a goal that may require you to liquidate in the shorter term.
2. Your risk tolerance is relatively low.
3. You seek immediate returns and are not as concerned with long-term growth.

For those who are using the income, the market value fluctuations of these securities are not relevant.  The value may go up and down, depending on investor’s feelings about changes in interest rates, but if you are planning to hold the security long-term to receive the income, the market value has no bearing on that. Income has not changed.  The fundamentals of the economy are positive and companies are still making their interest and dividend payments as expected. If you are invested for income, and your objectives have not changed, we recommend staying the course.

If you hold income securities to fund a goal that is in the relatively short term (less than a year), please make sure we know your plans.  We can help you be strategic about liquidating those holdings at the most advantageous time.

If you are holding onto cash:

1. You may have a growth or income objective.
2. You may have feared that the market was overvalued.
3. You may be waiting to see what impact the mid-term elections have on the markets.
4. You may have a high or low tolerance for risk long-term but are hesitant to invest large amounts when the prices are high.

If you are in this category and have been waiting for an opportunity to invest at a better price, now may be the time.  Money with a long time horizon could be invested in equities now at a discount. Certain income holdings may be available at a discount too, and we can help find the ones that are.

The above chart follows the S&P 500 index over the last 48 years. As you can see, the market falls back periodically to catch its breath. However, long term investors have been rewarded for the risk they take as shown in the growth realized over the long run. As painful as it is today, the market is just doing what the market does.

We put a lot of our energy everyday into studying the economy, the markets, and the investment options we’ve chosen for you, and that we own too.

Please call or email us to discuss your accounts if you’d like some additional information.  Or, just call us anyway.  We love speaking with you.

Then, relax, and don’t follow along with the media too much.  You’ve planned for this.  Life is better when you enjoy more and worry less.