6 Solutions for Volatile Markets

When markets get choppy, it pays to have a plan for your investments, and, to stick to it!

The markets have become choppy once again, as global demand for oil is outpaced by supply, Greece continues to appear on the verge of a possible exit from the Eurozone, and China tries to balance a slowing economy and potential bubble in real estate.

“Nothing causes investors to question their strategy and worry about their money like a dramatic sell-off,” says John Sweeney, Fidelity executive vice-president of retirement income and investment strategies. “A natural reaction to that fear might be to reduce or eliminate any exposure to stocks, thinking it will stem further losses and calm you fears, but that may not make sense in the long run.”

In fact, what seemed like some of the worst times to get into the market turned out to be the best times. The best five-year return in the U.S. stock market began in May 1932 in the midst of the Great Depression. The next best five-year period began in July 1982 amid an economy in the midst of one of the worst recessions in the post-war period, featuring double-digit levels of unemployment and interest rates.

But, “We`re Not There Now,” You Say

Agreed! Understanding what happens after we hit rock bottom provides your foundation.

Seeing that we are nowhere near recession-like conditions but have indeed experienced significant levels of volatility over the past year, the point is to be prepared by having a plan in place before an eventual market downturn.

Plan for Volatility

1 – Market downturns happen frequently, and have typically been followed by recoveries.

2 – Trying to time the market has proven challenging and could cost you.

3 – A plan that aligns your investment risk with your goals and situation may help you cope with volatility.

4 – You may want to consider a professionally managed solution.

What Does this Mean for You?

It may not be prudent to bail out of the market when it is volatile. What is appropriate: Being prepared.

“Market volatility should be a reminder for you to review your investments regularly and make sure you have an investment strategy with exposure to different areas of the markets – U.S. small and large caps, international stocks, investment grade bonds [and foreign sovereign debt] – to help match the overall risk in your portfolio to your personality and goals,” says Sweeney.

Here’s How to Prepare

1 – Have a Strategy

Your time horizon, goals and tolerance for risk are key factors in helping you ensure you have an investment strategy that works for you. Your time horizon is the amount of time you can keep money invested. Your tolerance for risk should take into account your broader financial situation such as your savings, income, and debt – and how you feel about it all. Looking at the whole picture can help you determine if your strategy should be aggressive, conservative, or somewhere in between.

2 – Be Comfortable with Your Investments

If you are nervous when the market goes down, you may not be in the right investments. Even if your time horizon is long enough to warrant an aggressive portfolio, you have to be comfortable with the short-term ups and downs you’ll encounter. If watching your balances fluctuate is too nerve-racking for you, think about re-evaluating your investment mix to find one that feels right. But be wary of being too conservative, especially if you have a long time horizon, because more conservative strategies may not provide the growth potential you need to achieve your goals. Set realistic expectations. That way it may be easier to stick with your long-term investment strategy.

3 – Diversify

One of the most important things you can do to help manage the risk of volatile markets is to diversify. While it won’t guarantee you won’t have losses, it can help limit them. Diversification was successfully put to the test during the extreme market volatility in 2008.

4 – Do Not Try to Time the Market

Attempting to move in and out of the market can be costly, particularly because a significant portion of the market’s gains over time have tended to come in concentrated periods. Many of the best periods to invest in stocks have been those environments that were among the most unnerving. Investors face long odds in trying to time the ups and downs of the market, and research shows they tend to increase their allocations to stocks ahead of downturns and decrease their exposure just prior to market rallies – the opposite of what you should do.

5 – Invest Regularly Despite, in fact Because Of, Volatility

If you invest regularly over months, years, and decades, you can actually benefit from a volatile market. Through a time-proven investment technique called dollar cost averaging, you invest a set amount every week, month, or quarter, regardless of how the market’s doing. Over the years, you’ll buy more shares of each investment option when prices are low, and fewer when prices are high. As a result, the average price per share of your investments may be lower than if you invested all your money at once. More importantly, you avoid the temptation of trying to time the market.

6 – Consider a Hands-Off Approach

To help ease the pressure of managing investments in a volatile market, you may want to consider an all-in-one portfolio or a professionally managed account for your longer-term goals such as retirement, wealth creation and overall capital preservation. Model portfolios provide diversification with exposure to various asset classes and investment styles in a single portfolio, with the added benefit of professional asset allocation and investment selection.

Bottom Line

Rather than focusing on the turbulence, wondering if you need to do something now, or what the market will do tomorrow, the prudent course of action is to focus on developing and maintaining a sound investing plan – taking control of variables that are within your control. A solid plan will help you ride out the peaks and valleys of the market, and may help you achieve your financial goals.

Article sourced from Fidelity Insights Leadership Series

Personalized Management of Your Portfolio

As a professionally designated Portfolio Manager, I can provide you hands-off, discretionarily managed investment solutions, tailored to your unique objectives and risk tolerances.

This level of personalized portfolio management requires an individual written agreement known as an Investment Policy Statement incorporating investment parameters, that, once put in place, allows for daily market decisions to be made on your behalf, providing you the freedom to focus your time where it matters to you most.

Contact me directly at 416.838.3617 or nparkhouse@pssecurities.ca to discuss.

Sincerely,
Nathan