• Investing & Markets

Market Volatility: How Will You React?

October 18, 2018 | Amin Dabit, CFP®

As investors across the globe have seen, the market experienced some volatility last week.

When markets start to get volatile, it’s important to remember a few basic investing principles. As you monitor your portfolio during volatile times, make sure to keep these important factors in mind.

Market Volatility is Normal and it is Important Not to Overreact.

With last week’s action, it may feel like the market has been bumpy, but when you look at markets historically it hasn’t been as extreme as it may have felt.

Last week, both the S&P 500 and the Dow dropped more than 4%. Usually, the U.S. stock market declines in one out of every three years. When U.S. stock markets decline, the average drop is 14%. Volatility may feel concerning when you’re in the midst of it, but taking risk is also what drives wealth creation for stockowners.

During volatile market times, it’s crucial to maintain patience and discipline. If you’re an investor, you’re also a human – meaning that it’s not so easy to kick back and stay calm during downward volatility. Nobody likes to see the value of their portfolio decline. So if you have a financial advisor, the most important thing he or she can do for you in times like this is help you avoid making rash portfolio changes – and stay the balanced long-term course.

A Diversified Portfolio is the Best Way to Position for Whatever Comes Next.

Regardless of market conditions, diversification is key. When market conditions are volatile, it’s a great time to assess how well diversified your portfolio is, and make any changes needed. Here are some resources on diversification:

When markets are good, confident predictions can lead to mistakes that can derail your portfolio. You can’t control the markets, but you can take ownership of your investment strategy and asset allocation.

When stocks decline, your portfolio declines too. That’s why you diversify – to cushion against the blow of a decline like what we’ve seen in markets last week. If you’re invested in U.S. stocks, you’ve seen that the few hot stocks that were supporting the market have started to fall out of favor. On a relative basis, that bodes well for a more diversified sector and style approach.

We all know that markets go both up and down, and when they go up we’ll likely see substantial upside potential in a few battered and unloved sectors, like emerging markets stocks and bonds. Over the last several years U.S. stocks have trounced all other major asset classes. That won’t last forever, and folks that stay diversified and rebalance periodically will reap the benefits.

Don’t Let Emotion Get the Best of You.

Many experts suspect that a combination of the Fed indicating more rate hikes and Vice President Mike Pence announcing a tougher policy on China caused the recent market decline. While this could slow global growth, we aren’t predicting an imminent bear market (although that could still happen).

It’s normal for investors to be nervous during volatile markets, especially given how long it’s been since we’ve experienced a meaningful decline. We encourage investors not to succumb to the stress of a volatile market by bailing out or chasing the latest asset class that is doing well.
As a rule of thumb, focus on a global, multi-asset class portfolio strategy to deliver superior risk-adjusted returns over time. And when the markets take a dip, remember the importance of a long-term plan for your personal situation that will ultimately provide the best chance to get the financial returns you need.

If you have any additional questions or concerns, contact a financial advisor.

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