When markets go haywire

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Nick Foy, CFP®

Every once in awhile, and sometimes more often than that, markets go nuts. Investors (over)react to some random news, in an attempt to predict an inherently unknowable future, and everyone pays.

We call the market gyrations “volatility,” especially when the market goes down. I’ve noticed that when the market goes up, we don’t call it anything; we just go on about our lives as if markets going up is normal and to be expected, like Mr. Market owes us something.

But, how should investors handle the trepidation associated with markets and headlines that cause discomfort? Here are a few tips:

  1. Control what you can. With investing, there are certain things that are entirely in our control. We have a pretty good idea about which asset classes are the riskiest, and which are the most conservative, relative to one another. Owning a portfolio that blends the right mix of those will give investors a better chance of success.

    Investors who are planning to retire next year, and are hoping to have a portfolio value that somewhat approximates the current number, probably shouldn’t be invested 100% in stocks, but if they want enough growth to ensure their portfolio lasts a lifetime, they probably shouldn’t be invested 100% in bonds either.

    Once an appropriate mix of assets has been decided upon, stick with it. Through thick and thin, hell or high water. Rebalance when the market dictates that it’s necessary. Unless something with your situation changes, there’s probably no need to modify your investment portfolio just because of volatility, which is a predictable part of the investment experience.

  2. Ignore what you can’t. Markets go berzerk. It’s not if, it’s when. That is the nature of risk. Younger investors who are accumulating assets should be begging for market drops, which allow them to purchase the same assets at a discounted level. Investors with shorter time horizons should be owning a larger percentage of less risky assets in order to protect against the wild rides associated with stock investing.

    Guessing which market or individual company will outperform relative to its peers over any given time frame is a waste of time, as only hindsight makes it clear which assets would’ve been the best to own.

    From 2000-2009, investors who owned globally diversified, balanced portfolios, and not just US stocks (as defined by the S&P 500) actually did just fine. Those that only owned US stocks were likely less enthused with their investment returns.

    The tide shifted this decade, and (so far) US stocks have significantly outperformed their international peers. Knowing that gives us absolutely no insight into how markets will perform over the next 10 years, and that’s okay. Owning it all is the only way to ensure we receive a solid share of global market returns.

  3. Move on with your life. Technology has provided us some incredible insight into the value of our assets, down to the second. Even Zillow has granted us a decent estimate as to the value of our homes on a daily basis. But sometimes, those insights can be TMI.

    I’ve noticed that most people don’t overreact and sell their primary residence if their local housing market softens some. The decision to purchase in a given neighborhood is driven by a multitude of factors, and the process of reversing that decision is difficult, and can be costly.

    Treating investment portfolios similarly would provide investors a better chance for success. If checking the value of your portfolio gives you heart palpitations, don’t do it. Ask this question: Do I think the value of the market (and my portfolio) will go up or down by the time I need this money? The longer the time period, the more likely a stock-heavy portfolio will increase in value. Only have a year or two? Who knows what will happen? But a 10, 20, or 30 year holding period provides a much higher degree of confidence that a broadly diversified, globally invested portfolio will have a satisfactory return. Less time than that, a more conservative portfolio might be a good idea.

    But either way, once you decide a mix of assets that makes sense, move on and tackle another project.



The value of an advisor

I’ve worked with thousands of self-directed investors who made exactly the wrong decision at exactly the wrong time. Buying high, selling low. Chasing past performance. Predicting future performance. Overpaying to invest.

It’s why I decided to become an advisor and invest on my clients’ behalf; to provide a buffer between them and the potential for a catastrophically poor decision. Portfolio design isn’t complicated, but maintaining your sanity when markets don’t behave often requires the type of accountability that only a professional advisor can provide. Even if you have the time, the knowledge, and the desire to do it yourself, hiring someone to hold you accountable could be money well spent.


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