Planning on Higher Volatility
One of the things I like to remind my clients is that we should plan on higher volatility in their portfolios then we are used to in history. While there are a number of reasons such as the backlash against globalization and struggling growth rates, I believe there are two that are playing a more central role. The first is that of the 24/7 news cycle. It is my soapbox to remind everybody that even the “money” news channels are simply part of the entertainment industry. They have to sell big stories in order to get viewers in order to get advertisers. This combined with electronic trading has made the past 15 years seen more market move of 3% or more than the last 50 years combined.
As you can see in the chart above, large market moves have become shockingly common versus history. This can be quite terrifying for the average investor, however, returns have still averaged about the same historically. So what can we learn from this? Be very cautious playing the market up and downturns. The news may make it sound like it is the end of the world. In their defense, these are bigger drops if you compare to the 50’s through 90’s. But the volatility has become the new normal now and the investor must be prepared for it.
The best way to handle this type of volatility is to have a plan set up that you know will succeed over the long term. Lay out your goals and all of your assets and liabilities. Use a planner to see if you are going to be okay and what the right about of stocks vs bonds is appropriate to meet your goals. If you do this well, the volatility can actually be your friend and an opportunity to add to your returns. Remember that it is the volatile market that Warren Buffet gets excited about and so should you. If you ever need any help on taking advantage of a volatile market or finding a more stable portfolio so you feel comfortable handling the overblown news cycle, please never hesitate to reach out.