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Coping with Market Volatility
By Greg Patterson and James Allen Canady
fmrn.
Recently we have seen news of the coronavirus
dominate the headlines and cause turmoil in
the markets. Keeping your cool can be hard to
do when the market goes on one of its periodic
roller-coaster rides. It is useful to have strategies
in place that prepare you both financially and psychologically to handle market
volatility. Here are some ways to help keep yourself from making hasty decisions
that could have a long-term impact on your ability to achieve your financial
goals.
• Have a game plan. Having predetermined guidelines that recognize the
potential for turbulent times can help prevent emotion from dictating
your decisions. You also can use diversification to try to offset the risks
of certain holdings with those of others. Diversification may not ensure
a profit or guarantee against a loss, but it can help you understand and
balance your risk in advance.
• Know what you own and why you own it. When the market goes off
the tracks, knowing why you originally made a specific investment can
help you evaluate whether your reasons still hold, regardless of what the
overall market is doing. Understanding how a specific holding fits in your
portfolio also can help you consider whether a lower price might actually
represent a buying opportunity.
• Remember that everything is relative. Most of the variance in the returns
of different portfolios can generally be attributed to their asset allocations.
A well-allocated, diversified portfolio is no guarantee that you won’t suffer
losses, of course, but diversification means that just because the S&P 500
might have dropped 10% or 20% does not necessarily mean your overall
portfolio is down by the same amount.
• Tell yourself that this too shall pass. The financial markets are historically
cyclical. Even if you wish you had sold at what turned out to be a market
peak, or regret having sat out a buying opportunity, you may well get
another chance at some point. It is normal to feel like the markets will rise
forever during bullish periods or drop until they are worthless once things
take a negative turn. Although we cant predict when the coronavirus
threat will end, you may find comfort in knowing that we have experienced
similar market movements, from similar threats, in the not-too-distant
past: In 2015-2016, the zika virus sent markets down 12.9 percent. The
SARS virus, in 2003, resulted in a 12.8 percent decline for the S&P 500. We
have seen this before—and we have made it through to the other side.
• Be willing to learn from your mistakes. Anyone can look good during
bull markets; smart investors are produced by the inevitable rough patches.
Even the best investors aren’t right all the time. If an earlier choice now
seems rash, sometimes the best strategy is to take a tax loss, learn from
the experience, and apply the lesson to future decisions. Experts can help
prepare you and your portfolio to both weather and take advantage of the
market’s ups and downs.
• Consider playing defense. During volatile periods in the stock market,
many investors reexamine their allocation to such defensive sectors as
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consumer staples or utilities (though like all stocks, those sectors involve
their own risks, and are not necessarily immune from overall market
movements). Dividends also can help cushion the impact of price swings.
According to Standard & Poor’s, dividend income has represented roughly
one-third of the monthly total return on the S&P 500 since 1926, ranging
from a high of 53% during the 1940s to a low of 14% in the 1990s, when
investors focused on growth.
• Stay on course by continuing to save. Even if the value of your holdings
fluctuates, regularly adding to an account designed for a long-term goal
may cushion the emotional impact of market swings. If losses are offset
even in part by new savings, your bottom-line number might not be quite
so discouraging. If you are using dollar-cost averaging—investing a specific
amount regularly regardless of fluctuating price levels—you may be getting
a bargain by buying when prices are down.
• Use cash to help manage your mind-set. Cash can be the financial
equivalent of taking deep breaths to relax. It can enhance your ability
to make thoughtful decisions instead of impulsive ones. If you have
established an appropriate asset allocation, you should have resources on
hand to prevent having to sell investments to meet ordinary expenses.
Having a cash cushion coupled with a disciplined investing strategy can
change your perspective on market volatility.
• Remember your road map. Solid asset allocation is the basis of sound
investing. One of the reasons a diversified portfolio is so important is that
strong performance of some investments may help offset poor performance
by others. Even with an appropriate asset allocation, some parts of a
portfolio may struggle at any given time. Make sure your asset allocation is
appropriate before making drastic changes.
• Look in the rear-view mirror. If you are investing long term, sometimes it
helps to take a look back and see how far you have come. If your portfolio
is down this year, it can be easy to forget any progress you may already
have made over the years. Though past performance is no guarantee of
future returns, the stock market’s long-term direction has historically been
up. With investing, it is important to remember that having an investing
strategy is only half the battle; the other half is being able to stick to it. If
patience has helped you build a nest egg, it just might be useful now, too.
In addition to the above, remember that the job of financial advisors is to
advise, to keep you on track, to help you make progress with your financial
goals, and to make sure you have an updated financial plan for long-term
success. In times of market volatility and uncertainty, never hesitate to reach out
to a financial professional.
This material has been provided for general informational purposes only and
does not constitute either tax or legal advice. Although we go to great lengths to
make sure our information is accurate and useful, we recommend you consult
a tax preparer, professional tax advisor or lawyer. Greg Patterson and James
Allen Canady are financial advisors located at Atlantic Wealth Management
in Morehead City. They offer securities and advisory services as Registered
Representatives and Investment Adviser Representatives of Commonwealth
Financial Network, Member FINRA/SIPC, a Registered Investment Adviser. They
can be reached at 515-7800 or greg@myatlanticwealth.com. Copyright 2020.