• Investing & Markets

Market Recap – Riding The Roller Coaster Of Market Volatility

April 8, 2016 | Brendan Erne, CFA

Market Digest – Week Ending 4/08

It was another volatile week with US stocks moving more than 1% on three of the five trading days. Despite starting the week down, there was a short relief rally on Wednesday when US Fed minutes indicated an April rate hike is unlikely. Ultimately, it wasn’t enough to keep stocks out of the red before the weekend. A strong rebound in oil prices led commodities higher, with gold and bonds also finishing in positive territory.

Weekly Returns:

S&P 500: 2,048 (-1.1%)
FTSE All-World ex-US: (-0.6%)
US 10 Year Treasury Yield: 1.71% (-0.06%)
Gold: $1,240 (+1.5%)
USD/EUR: $1.140 (+0.0%)

Major Events:

• Monday – Alaska Airlines agreed to buy Virgin America for $2.6 billion, a combination that would create the 5th largest airline in the US by traffic.
• Tuesday – Following new government rules aimed at cracking down on tax inversions, Pfizer abandoned its planned $150 billion takeover of Allergan.
• Wednesday – The US Justice Department filed an antitrust lawsuit challenging Halliburton’s planned takeover of Baker Hughes.
• Wednesday – US Federal Reserve minutes showed a number of officials are opposed to an April rate increase.
• Wednesday – The Department of Labor announced its long-anticipated fiduciary rule, which aims to better protect investors from costly and inappropriate financial advice.
• Thursday – Fed Chairwoman Janet Yellen hosted a meeting with Ben Bernanke, Alan Greenspan and Paul Volcker in an attempt to dispel worries over the US economy.
• Friday – Belgian authorities arrested Mohamed Abrini, the third suspected attacker in the Brussels airport bombing in March.

Our take:

The first quarter is at an end. How did your portfolio fare? Is there anything the last three months can teach us? This is exactly why we write our quarterly Market Review & Outlook, which can be found here. And given its extreme volatility, this quarter in particular offered a powerful lesson: how to ensure your emotions don’t derail your investment portfolio.

Market volatility is a metaphorical roller coaster—it can scare the best of us. But detaching these emotions, in this case fear, from investment decisions is one of the hardest psychological biases to overcome. With over 1 million free Dashboard users, we have access to a large amount of financial data. And sure enough, we saw a number of situations around mid-quarter where investors jumped ship and went to cash. Some did it precisely at the market bottom. Then what happened? Just as quickly as the market fell, it went right back up again. So the only thing those investors did was lock in a 10% loss. That hurts.

What could they have done better to handle the volatility? A few things:

1. Consider hiring an advisor. If you have a tough time separating emotions from your decision making, remove the need to make decisions altogether. This is one of the biggest benefits of having your investments professionally managed. An advisor (preferably a fee-based RIA) can objectively evaluate your financial goals, and recommend a long-term strategy best fit to get you there. And if you still get scared from time to time, you have a voice of reason just a phone call away.

2. Periodically rebalance. Disciplined rebalancing is one of the most important components of a successful long-term strategy. It ensures you’re consistently buying low and selling high. Again, this is something an advisor can help with. It can be emotionally difficult to sell some of your best performers and buy your worst performers. But over time it works. And market volatility can create some valuable rebalancing opportunities. Had you added funds to stocks during Q1’s downturn, particularly emerging markets, you would have fared very well in the subsequent rebound.

3. Stick to your long-term plan. Listen, it’s okay to be opportunistic in a down market. As we just mentioned, you can use it as a rebalancing opportunity, or even a chance to pare back concentrated positions. But you should avoid drastic changes to your long-term strategic portfolio allocation (e.g. selling everything and sitting in cash). A proper allocation should accommodate both down and up markets.

All of these things can help safeguard your portfolio from one of its biggest enemies: your emotions. And I’ll leave with one final piece of advice: if volatility is spiking and you find yourself frightened, not knowing what to do, it’s often best to do nothing at all.

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