Another period of Stock Market volatility is upon us. There has been many periods of increased volatility in the past. Sometimes these periods of higher volatility are called corrections. The simple truth is that stock markets do pull back at times. It would be wonderful if the world stock markets kept advancing but that is not reality. At times like this it is best to go back to how we deal with this. For those of you who have been with us for a long time, this may be a review of how we dealt with stock market volatility many times in the past.
1) Review your objectives:
Ultimately for many of you your objectives revolves around wealth building to provide income later in life or you are retired and want to provide for an increasing income stream (effects of inflation) to last your life time. Depending on your risk tolerance and understanding that we have to deal with the long term effects of inflation it makes sense to invest in some appropriate combination of asset classes to achieve the balance that is consistent with your objectives. If objectives haven’t changed then we should refer back to your investment plan and discipline.
2) Review your portfolio:
For most of you our periodic meetings in the past has provided that review and in fact adjustments have been made. What have we discussed that has helped us during these times of volatility?
a. Do we have the right allocation invested in a diversified stock portfolio which depends on our income needs and individual risk tolerance? These are the $ that we won’t need until possibly ten or more years.
b. How much of our portfolio is invested with the objective of offsetting the stock market risk we are taking? High quality bonds that come due periodically are good examples. In addition we are still receiving dividends from our stock portfolio while stock prices are changing.
c. When we have an allocation to those investments that can potentially offset the stock market risk then it continues to make sense to avoid emotionally reacting to short term stock market volatility. Reacting emotionally in many cases leads to bad decisions.
3) What are some of the Tail Winds and Head Winds with regard to the Stock Market?
The point here is that we can always list both good and bad when it comes to predicting the stock market direction.
a. Head Winds:
i. The Chinese Economy is showing signs of slowing. The Demographics associated with more Chinese people moving to the cities remains a long term consideration which could help their economy.
ii. Drop in Oil Prices: Hard to categorize this one. Seems to be bad in the short run for oil companies but also has the potential to help the economy.
iii. The potential for a rise in interest rates: Hopefully short term in effect but may also signal that the economy is improving.
b. Tail Winds:
i.The economy is still expanding
ii.Interest rates remain low historically
iii.The housing market is showing signs of improvement
The Truth is nobody really knows so maintaining a non-emotional discipline remains our best advice.
Charlie, Russ and Anthony
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
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 a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Investing involves risk including loss of principal. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time. Bonds are subject to market and interest rate risk if sold prior to maturity.
Bond values will decline as interest rates rise and bonds are subject to availability and change in price.