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Diversification is Key to Weathering Market Volatility

We’ve recently experienced a sudden reappearance of big down days and also some big up days, and while it’s natural to try to find what is to blame, volatility often has no obvious cause, even when looking at it in the rearview mirror.

While it’s difficult to pinpoint what exactly causes volatility, the sell-off last week could likely be contributed to two speeches from two weeks ago.

The first speech showcase Fed Chairman Jerome Powell, who said that rates are still a long way from “neutral,” and that we are likely to go past it (“neutral” is usually thought of being somewhere around the 3-3.5% range). Keep in mind, the Fed has for nearly a decade found ways to be more accommodative, and it is likely that short rates will continue to rise unless economic data changes course significantly.

The second speech was delivered by Vice President Pence on China. It focused on Chinese election meddling, aggression, and unwanted behavior. Pence noted the ongoing – if not escalating – tensions between the United States and China, so trade conflict and tariffs are not only likely to go away soon, but could also intensify.

On the other side of rising rates and trade conflict, however, we’ve seen phenomenal earnings growth over the past few quarters. Big boosts and support for companies have come through tax cuts and keeping wage growth low, driving margins to the highest in decades.

The reality is, there have been six similar pullbacks in the last seven years – and each rebounded relatively quickly. This is why panic or knee-jerk reactions to market events like this are rarely good for your financial strategy. While the current bull market is the longest ever by some measures, eventually it will end. The interest rate environment and trade conflict have become bigger headwinds, and globally, the market has lost positive momentum.

This month’s pullback saw tech and other high momentum stocks hardest hit. Keep in mind, it’s not unusual for what sees the most success fall fastest when markets decline.  This is why diversification is so important – and a more diversified approach to U.S. stocks weathers the down days better. And of course, diversification at the asset class level helps even more.

It’s too soon to say that there is a true shift away from tech and momentum leadership. But eventually, as it always has, leadership will rotate. We can’t know if it’s happening next year or beyond – or if it’s already happened. Because of this, remaining diversified and rebalancing (which creates benefit from actual math, and not just guesses) are some of the best ways to ensure you’re in a good spot, regardless of what the market does and when.

For more information, read our free “Investor’s Guide to Volatile Markets”.

Read the Free Guide

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Craig Birk leads the Personal Capital Advisors Investment Committee and serves as Chief Investment Officer. His focus is translating improvements in technology into better financial lives. Craig has been widely quoted in the Wall Street Journal, Bloomberg, CNN Money, the Washington Post and elsewhere. Prior to Personal Capital Advisors, he was a leader within the portfolio management team at Fisher Investments, helping assets under management grow from $1.5 billion to over $40 billion. Craig graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.
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