If you're reading this, you probably know that the market has been volatile lately, to say the least. Recently the DOW was down about 14 percent off the high and the index had its worst month in over five years.
Do you know where your financial advisor is?
When the going gets tough, a lot of financial advisors tend to disappear. Sometimes it's because the account is just not that important to them. Other times, it's because they don't know what to say or maybe the reason is their client's portfolio just wasn't built with market downturns in mind. Whatever the reason, in times like these a lack of communication can make even the most reasonable investor more and more worried.
The conversations I've been having with my clients about market corrections:
I've reached out to every one of my clients recently, and spoke with them about the market conditions and provided them with the knowledge they need to hopefully provide peace of mind through this volatile time. In this article I'll simplify what I've shared in these conversations.
Right now, the market is worried about China, oil, the dollar and the possibility of an interest rate hike. A lot of investors still have 2008 on their minds (mortgage crisis), and you might be wondering how the current market environment compares to that downturn. In my opinion, the current market volatility isn't a U.S.-based issue like it was then. This is a global issue that is hinging on growth and stability in China. Take a look at this video explanation on my website for more details.
The volatility has been extreme, and I think it can continue. However, as I always say, the market climbs a wall of worry. I've been doing this since 1992, and believe me when I say that there is always something to worry about. In 2011, it was the Eurozone and the DOW went down about 17 percent in roughly 13 days on that fear. Today it's China and interest rates, and tomorrow it's going to be something else.
Can we go down further than we have? Yes, of course. While I don't think this situation is as bad as the Eurozone crisis in 2011, in the last 23 years I've learned to know better than to make short-term predictions -- the market will always make you look foolish! Although I do believe if we look out six months to a year, I am hopeful we will be better off than we are today. Always keep in mind, whatever worries the markets may throw at you, you can take steps to prepare for downturns and even make the most of them.
How to get through tough times as an investor
I generally advise a two-pronged approach to investing through volatility.
First, I try to help clients build diversified portfolios with a focus on downside protection. Your returns might not be as strong when the market is flying high, but it helps a lot of clients sleep at night to know that they have a better chance of going through the inevitable rough periods without the same level of (much larger) losses as you might see in individual positions/equities -- though of course this is never guaranteed. Every period is different and there are no certainties in investing, but I've found that managing downside risk can be a great strategy to manage risk and get more sleep. To find out more about dealing with volatility, take a look at my articles about how to handle volatility and how to use alternative investments to limit downside risk.
Next, depending on your individual strategy and your risk tolerance, you might want to consider building positions when the market is down. Intellectually, we all know that the best thing to do as an investor is buy low and sell high. But this can be extremely tough to do because we never really know when the low has arrived -- and in the meantime, it can be very stressful to see account balances going down. However, if you keep Warren Buffet's advice in mind ("Be fearful when others are greedy and greedy when others are fearful"), a down market can be a great time to build a portfolio while it's hopefully "on sale."
Not all of my clients build portfolios with extra downside protection and buy into market downturns, but these approaches can help provide a basic portfolio strategy that works in many situations.
Of course, whether a given investment strategy is right for you depends on your individual needs as a person and as an investor. That's why it's important to have these kinds of conversations with your advisor -- you can find out what's going on, how it relates to your portfolio, and what you can do to get the most from your investments while also getting the most sleep at night.
If your broker is hiding under their desk instead of calling you, there's something very wrong. Times like these don't have to be scary, but they do need to be approached proactively and with your individual needs in mind. That way, you can make the best of even a tricky market situation.