Dealing with Volatile Markets
By Rick Imhoff, CFP ®
You may have noticed that both the stock and bond markets have been a little volatile lately. In fact, the broad market stock indices are in correction territory, which is typically considered a 10% price decline or more, while some stocks are in a bear market, which is typically considered a 20% price decline or more. The Fed has raised interest rates a few times over the past several months, resulting in a sharp decline in bond prices.
In addition, there is concern about a slowing global economy and a flattening yield curve, which may, but not always, signal a recession in the next year or two. Corporations have also added a significant amount of new debt since interest rates have been so low, which may be a concern if the economy does indeed slow down.
You can also add the political discourse into the mix creating even more uncertainties. The tariff disputes with China and other countries are causing disruptions for some businesses which is expected to continue for some time.
With all this going on in the investment environment, it’s important to keep in mind that the markets do fluctuate, sometimes quite a bit, and sometimes rather quickly. For those investors with a longer time horizon, market fluctuation creates buying opportunities. It’s particularly beneficial for investors making contributions each pay period into their 401(k) plan as they can dollar cost average during down markets.
For investors nearing retirement or in the early years of retirement, large fluctuations in their investment portfolio can be a little unnerving. If planned withdrawals are based on the market value of the portfolio on the day of retirement, a more than expected drop in the market may result in reducing the amount of the withdrawal.
However, on a positive note, the economy appears to be fundamentally sound. The unemployment rate is at its lowest level in years and inflation, though rising a little, is still at a moderately low level. Interest rates have risen this year, helping investors earn more on their savings, but still low even to encourage business owners to borrow to grow their companies.
The expectations are that the markets will continue to be volatile, at least in the near term. Here are a few ideas on how to effectively deal with this increased volatility:
Diversify Your Portfolio
The importance of diversification cannot be overstated especially for those who count on their portfolio to provide for a comfortable retirement. Diversification can help to reduce the overall risk of your portfolio. For example, by adding a 20-30% allocation to fixed-income securities in an all stock portfolio can help reduce the overall volatility of the portfolio while not having a significant impact on the portfolio’s rate of return. The same can be true for adding a 20-30% allocation to stocks in an all fixed-income portfolio.
Buy Quality Investments
Especially in times when investors want higher rates of return, there is the emotional tendency to take on riskier investments. In the short run, it may seem like a good idea, but longer term, the markets will typically adjust, causing larger declines with the riskier investments than they would have experienced with more quality investments.
Develop an Investment Policy Statement (IPS)
This is an important document every investor must have to better manage their investment portfolio. An IPS can set appropriate asset allocation targets and ranges around those targets while establishing benchmarks to measure performance. Strict adherence to the IPS can help to take much of the emotion out of the investment decision making process.
Hire a Professional
A professional money manager who embraces a fiduciary standard can be a calming force to help you stay focused on your long-term financial goals during volatile times. A professional who knows you and your unique situation can be a go to person to talk more logically about changes to your investment portfolio.
Rick Imhoff, CFP®, is Executive Vice President & Senior Trust Officer for MidAmerica National Bank. He can be reached at 309-647-5000, ext. 1130 or by email.
Investments are not FDIC-insured, hold no bank guarantee, may lose value, are not a deposit, and are not insured by any federal government agency.