Sep 13, 2019 Investing through Market Volatility

Bouts of market volatility are an unnerving, but normal, feature of long-term investing. They’re not fun, but you can expect to see market declines periodically throughout your investing career.

You often hear that investors shouldn’t pay attention to the markets’ day-to-day movements. But it’s sometimes impossible to avoid—like when stocks fall 3% in a day. During these times, it can be hard to sit still. You can’t help but think: “Shouldn’t I be doing something?”

Here is what we consider when volatility hits:

  • Rebalance your portfolio. Volatile times can lead to rebalancing opportunities. Market changes can skew your allocation from its original target. We may rebalance your portfolio by selling positions that have become overweight in relation to the rest of your portfolio and buy positions that have become underweight.
  • Tax Loss Harvest. Volatile markets can give us good opportunities for tax loss harvesting in taxable accounts. By selling a security that has experienced a loss, you are able to offset taxes on both gains and income. The sold security is replaced by a similar one, maintain an optimal asset allocation.
  • Stress test your portfolio. We continually test portfolios to see how their asset mixes hold up in thousands of hypothetical market environments. These “stress tests” verify that the right asset allocation will support your goals, even under the strain of external stress factors.
  • Make sure you have a diversified portfolio. The best approach to protect your portfolio is to diversify among a broad mix of asset classes, including stocks, bonds and alternative investments. We review your portfolio to make sure that each asset class is doing what we expect it to do and that the mix matches your target asset allocation.
  • Avoid jumping in and out of the market. While we do make allocation shifts from time to time, we do not completely jump into and out of the market. Successful market timing is a very inconsistent investment strategy because it requires making two correct decisions: getting out at the right time and getting back in at the right time. It’s easy to look back and say with hindsight that the stock market was overvalued at a particular time and due for a decline. But no one has been able to accurately predict market declines on a consistent basis.

Here is what you can do when volatility hits.

  • Remember that your portfolio is not “the market”. The performance of your diversified portfolio can be very different from the performance of “the market”. It’s likely that your portfolio has a mix of both stocks and bonds and may also be diversified between small cap stocks, non-U.S. stocks and alternative asset classes. “The market” is generally only U.S. large cap stocks only and your portfolio is likely to have different performance.
  • Focus on the Long Term. If you’re a long-term investor, resist the urge to make drastic changes to your investment plan in reaction to market moves. Time smooths out market fluctuations, which can help you put any concerns into context. For instance, the S&P 500 Index has experienced double-digit annual losses in 11 of the last 92 years (through 2018) and has only experienced double-digit losses twice over any rolling five-year period. Therefore, for a long-term goal, you can feel more confident holding on to stocks, even if you experience short-term declines[1].
  • Review your risk tolerance. The risk you take should change as your current situation and life stage change. Market volatility can be a wake-up call to consider adjusting your target asset allocation before a major change in your portfolio.
  • Tune out the noise and trust your asset allocation. Try not to look at your accounts every day or keep the daily changes in context of your longer-term goals. Seeing the same story at the top of every news site you visit, as well as seeing related portfolio fluctuations, is likely to do more harm than good. If you have an asset allocationthat’s based on your goals, risk tolerance, and time frame, you should have confidence in your portfolio’s ability to handle market turbulence. That’s why it’s so important that you have an asset allocation they can remain committed to, even when markets might appear to be in a free fall.
  • Resist the urge to sell based solely on recent market movements.Making shifts to your portfolio in hopes of avoiding a loss or finding a gain rarely works long-term. Staying the course, while difficult emotionally, may be healthier for your portfolio. Investors who panicked and dumped stock holdings in 2008 and 2009, believing they could get back in when “the coast was clear,” likely suffered equity losses without the benefit of fully participating in the recovery. This doesn’t mean you should hold on blindly, but we suggest considering an investment’s future prospects and the role it plays in your portfolio, rather than being guided by noise and fear.
  • Check up on your spending. For those in the deaccumulation phase, your spending rate can be important to making your money last. There are lots of things out of your control like how long your live, the rate of inflation, taxes and market returns. However, you can control your spending rate.
  • Make volatility work for you by Dollar Cost Averaging. For those in the accumulation phase, saving and investing regularly can be important to your long-term financial goals. If you invest regularly, you’re putting the market’s natural volatility to work for you. Buying a fixed dollar amount on a regular schedule offers opportunities to buy low during market dips. Over time, regular contributions can help reduce the average price you pay for your fund shares[2].

We realize it’s easy to say volatility and market dips work themselves out over time, but we realize it’s much harder to live through. It can be incredibly difficult to watch your portfolio lose value, no matter how much of a buying opportunity it presents. Please contact your advisor if you would like to review the volatility of your portfolio.

 

IMPORTANT DISCLOSURES

Leonard Rickey Investment Advisors, PLLC (“LRIA”), is an SEC registered investment adviser located in the State of Washington. Registration does not imply a certain level of skill or training. For information pertaining to the registration status of LRIA, please contact LRIA or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).

This newsletter is provided for general information only and contains information that is not suitable for everyone. As such, nothing herein should be construed as the provision of specific investment advice or recommendations for any individual.  To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced herein is historical in nature and is not an indication of or a guarantee of future results. All indices are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

Your experience may vary according to your individual circumstances and there can be no assurance that LRIA will be able to achieve similar results for all clients in comparable situations or that any particular strategy or investment will prove profitable.   As investment returns, inflation, taxes and other economic conditions vary, your actual results may vary significantly. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. There is no guarantee that the views and opinions expressed herein will come to pass. This newsletter contains information derived from third party sources. Although we believe these third party sources to be reliable, we make no representations as to the accuracy or completeness of any information prepared by any unaffiliated third party incorporated herein, and take no responsibility therefore.

Stock investing includes numerous specific risks including the fluctuations of dividend, loss of principal, and potential illiquidity of the investment in a falling market. International and emerging markets investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Small cap stocks may be subject to a higher degree of risk than more established companies’ securities. The illiquidity of the small cap market may adversely affect the value of these investments. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. This newsletter should not be regarded as a complete analysis of the subjects discussed. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price. The risks associated with investment-grade corporate bonds are considered significantly higher than those associated with first-class government bonds. The difference between rates for first-class government bonds and investment-grade bonds is called investment-grade spread. The range of this spread is an indicator of the market’s belief in the stability of the economy. The fast price swings in commodities and currencies can result in significant volatility in an investor’s holdings. There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. The Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.

Any projections, forecasts and estimates, including without limitation any statement using “expect” or “believe” or any variation of either term or a similar term, contained here are forward-looking statements and are based upon certain current assumptions, beliefs and expectations that LRIA considers reasonable or that the applicable third parties have identified as such. Forward-looking statements are necessarily speculative in nature, and it can be expected that some or all of the assumptions or beliefs underlying the forward-looking statements will not materialize or will vary significantly from actual results or outcomes. Some important factors that could cause actual results or outcomes to differ materially from those in any forward-looking statements include, among others, changes in interest rates and general economic conditions in the U.S. and globally, changes in the liquidity available in the market, change and volatility in the value of the U.S. dollar, market volatility and distressed credit markets, and other market, financial or legal uncertainties. Consequently, the inclusion of forward-looking statements herein should not be regarded as a representation by LRIA or any other person or entity of the outcomes or results that will be achieved by following any recommendations contained herein. While the forward-looking statements here reflect estimates, expectations and beliefs, they are not guarantees of future performance or outcomes. LRIA has no obligation to update or otherwise revise any forward-looking statements, including any revisions to reflect changes in economic conditions or other circumstances arising after the date hereof or to reflect the occurrence of events (whether anticipated or unanticipated), even if the underlying assumptions do not come to fruition. Opinions expressed herein are subject to change without notice and do not necessarily take into account the particular investment objectives, financial situations, or particular needs of all investors. For additional information about LRIA, including fees and services, please contact us for our Form ADV disclosure brochure using our contact information herein. Please read the disclosure brochure carefully before you invest or send money.

INDEX DEFINITIONS

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. It cannot be invested into directly.

[1] Past performance cannot guarantee future results. It is not possible to invest directly in an index.

[2] Dollar-cost averaging does not guarantee that your investments will make a profit, nor does it protect you against losses when stock or bond prices are falling. You should consider whether you would be willing to continue investing during a long downturn in the market, because dollar-cost averaging involves making continuous investments regardless of fluctuating price levels.

 

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Important Disclosures

Leonard Rickey Investment Advisors, PLLC (“LRIA”), is an SEC registered investment adviser located in the State of Washington. Registration does not imply a certain level of skill or training. For information pertaining to the registration status of LRIA, please contact LRIA or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).

This is provided for general information only and contains information that is not suitable for everyone. As such, nothing herein should be construed as the provision of specific investment advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. There is no guarantee that the views and opinions expressed herein will come to pass. This newsletter contains information derived from third party sources. Although we believe these third-party sources to be reliable, we make no representations as to the accuracy or completeness of any information prepared by any unaffiliated third party incorporated herein and take no responsibility therefore.

Any projections, forecasts and estimates, including without limitation any statement using “expect” or “believe” or any variation of either term or a similar term, contained here are forward-looking statements and are based upon certain current assumptions, beliefs and expectations that LRIA considers reasonable or that the applicable third parties have identified as such. Forward-looking statements are necessarily speculative in nature, and it can be expected that some or all of the assumptions or beliefs underlying the forward-looking statements will not materialize or will vary significantly from actual results or outcomes. Some important factors that could cause actual results or outcomes to differ materially from those in any forward-looking statements include, among others, changes in interest rates and general economic conditions in the U.S. and globally, changes in the liquidity available in the market, change and volatility in the value of the U.S. dollar, market volatility and distressed credit markets, and other market, financial or legal uncertainties. Consequently, the inclusion of forward-looking statements herein should not be regarded as a representation by LRIA or any other person or entity of the outcomes or results that will be achieved by following any recommendations contained herein. While the forward-looking statements here reflect estimates, expectations and beliefs, they are not guarantees of future performance or outcomes. LRIA has no obligation to update or otherwise revise any forward-looking statements, including any revisions to reflect changes in economic conditions or other circumstances arising after the date hereof or to reflect the occurrence of events (whether anticipated or unanticipated), even if the underlying assumptions do not come to fruition. Opinions expressed herein are subject to change without notice and do not necessarily take into account the particular investment objectives, financial situations, or particular needs of all investors.

For additional information about LRIA, including fees and services, please contact us for our Form ADV disclosure brochure using our contact information herein. Please read the disclosure brochure carefully before you invest or send money.