Aug 12, 2022 What Should you do when there’s Market Volatility?

During this time of market volatility, we want to share the things we are doing and some things that you can do to help ease your worries.

  • Rebalancing 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 buying positions that have become underweight.
  • Tax Loss Harvesting. 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 to maintain an optimal asset allocation.
  • Reinvesting Dividends. We are automatically reinvesting dividends rather than having them go to cash. This way you’ll be buying more shares of your equity investments at lower prices.
  • Stress testing 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.
  • Making 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 are some things you can do right now:

  • 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 U.S. large cap stocks only and your portfolio is likely to have different performance.
    • The risk-off portion of your portfolio allocation – a combination of bonds, balanced and alternative investments – has done its job since the stock market’s peak by insulating the equity declines. These segments of your allocation are there to play defense for you. We can spend from them if you are taking regular distributions or we can use them as dry powder to rebalance into stocks.
  • 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 93 years (through 2019) 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.
  • 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 allocation that’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 that you 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 you 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.
  • Gifting. If you are gifting to your children, consider gifting securities to them while the markets are down. This reduces the value that you have to claim as a gift and then when markets recover, the securities they were gifted will be worth more.

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 decrease, 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.

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Important Disclosures

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