Volatility – What is it and how do I deal with it?
2018 has been a wild ride for stock investors. We started the year by shooting up 7% in January, only to be followed by a decline in February that left U.S. stocks down 4% for the year. The month of March witnessed stocks getting back to where they began the year. As we write this piece, the stock market is now up about six percent for the year. We have indeed had a volatile year.
What is volatility? It is the propensity to change rapidly, unpredictably and in a negative direction. Investment volatility is the sudden up and down movement of a security or investment. By that definition this year has been a volatile year. The stock market has traveled 28%; but, is currently up a little more than 6%. A lot of travel with not a lot of distance.
Volatility or investing risk is a normal part of the investment landscape. However, it is good to remind ourselves of the following four points as we work through investing volatility.
1 – Diversify your investments - Not all investments move in the same direction nor with the same magnitude. Diversification will help to dampen the downward and upward movement and smooth out your investment journey. The Advisor Select Portfolios have built in diversity; they are invested in large companies, mid-size companies and small companies, along with real estate, international funds including developed and emerging markets. Aside from the Advisor Select Aggressive fund, they also have investments in bonds including short and mid-term bonds, US treasury bonds, corporate bonds, high yield bonds and a money market fund. You can lower your investment risk by moving from the Aggressive through the Conservative Advisor Select portfolios
2 – Stay invested – timing the market is a very difficult thing to do. The art of getting in and out of the stock market at the right times is nearly impossible to do over an extended period of time. Let time be your friend and reap the rewards of long term investing.
3 – Invest regularly – Be consistent and disciplined in your investing habits. Remind yourself that when the stock market moves backwards that it is providing an opportunity to buy more stock at a lower price – just like buying shoes when they go on sale. We recognize good buying opportunities when we shop for clothing and food, when stocks decline, it is an opportunity to buy more for less.
4 – Remember the history of stocks - History tells us that not only do stocks recover from downturns; but they also set new highs. Know what your risk tolerance is and invest accordingly.
We hope you are enjoying the summer. Thank you for the opportunity to work with you!