Guard against stock market volatility, but don’t panic.
Was Yogi Berra right, is it really “déjà vu all over again”? It sure seems like something we’ve seen before. Europe is dominating headlines, the U.S. government is reverting to its dysfunctional bias. As a result, the stock market is acting irrationally. The volatility of the past four years has investors anxious about the stock market and their financial situation. Luckily, if you have a properly managed portfolio, you need not panic.
What Has Changed?
The reality is that nothing is fundamentally new since April. Yes, JP Morgan made some ill-advised trades, but that should not fundamentally impact the entire stock market.
Quite frankly, most of the issues dominating the headlines are the same issues that we’ve faced since 2009. The displeasure of a slow US economic recovery has been headline news since the warnings of a double-dip recession of summer of 2009. Greece’s insolvency became headline news in May ’10. The inability of Congress to raise the debt ceiling in an orderly manner led to the downgrade of US credit in August 2011.
Is Your Strategy Sound?
The recent volatility provides yet another reminder to go back to the basics and determine if you have an appropriate strategy.
You currently have an asset allocation, either by choice or by default. The question remains, “is my allocation appropriate for my situation?” Base your investment portfolio allocation on your specific circumstances. Unfortunately, there is often a significant disconnect between an investor’s goals or risk tolerance and portfolio investments. Be sure to regularly ask yourself, “is my portfolio well suited to my circumstances?”
You Should Be Taking Action
Please note that action does not equal panic, i.e., trying to time the market by moving in and out of in wholesale fashion. It is difficult to predict when the market will rise and fall, and even if the market is following a general trend. There will be up and down trading days. However, the action does entail disciplined asset allocation moves that will increase and decrease the level of risk in your portfolio as appropriate. The advice du jour of many advisors to simply “ride-it-out” or “hunker-down” is entirely incorrect.
While most of the recent events credited with the rise and fall of the market should not have any fundamental impact on the market, the reality is that they have affected the stock markets, the bond markets, and very likely on your portfolio, over the past several weeks. As these events have been unfolding, our firm began making adjustments to our client’s portfolios in May as the impact started to emerge.
Assuming that you are already operating under a clear and appropriate investment strategy, based on your circumstances, the recent environment presented select opportunities to both reduce/eliminate more volatile holdings and to rebalance core positions up to their target levels in a disciplined fashion.
The recent volatility is nothing new. We experienced this type of volatility, only worse, during the 2008 financial crisis almost four years ago. The spring of 2010 the Greek economic collapse began to unfold. In the third quarter of last year, domestic economic momentum appeared to stall. The prolonged debt ceiling impasse caused the U.S. to lose its AAA credit rating. Each of these examples should have served as a wake-up call. If you were impacted by any of these events but made no changes to how you managed your investment portfolio, shame on you.
Repetition is the key to learning. As with most things in life, financial lessons will repeat in various forms; from the tech bubble and financial meltdown to the debt crisis and issues yet to come. Will we learn? The real question is, when and how, will you take the steps necessary to adapt your strategies to protect yourself from these types of market volatility?
Bradley R. Newman, CFP® is with Roof Advisory Group, Inc., an independent investment management and financial advisory firm based in Harrisburg. The firm is a fee-only Registered Investment Advisor. We provide portfolio management and financial planning services for individuals and institutional clientele.
Reprinted from The Patriot-News June 3, 2012.