We certainly could use a crystal ball right about now, but that’s not how this works. We aren’t in the business of predicting the future. We are, however, in the business of making the best decisions possible with the most information possible.
During these times when the market becomes even more unpredictable and uncomfortably volatile, one might hear just about any advisor or financial “talking head” in the media urging investors to hold tight, do nothing, and to not react out of emotion. While advice like that is certainly not incorrect in totality, it certainly makes investors nervous at the thought of “doing nothing” while their portfolio is subject to the day-to-day market volatility.
It’s generally sound advice to not react out of emotion – and this rings true for all things in life, not just investing. Have you ever reacted to your own child out of emotion (or your own parent when you were a child), and regretted your response just moments later? I surely have – and it becomes clear that emotion often doesn’t help decision-making.
It’s also generally acceptable advice to “hold tight,” meaning BEFORE reacting, one should reassess the landscape. Take time to review your current situation as it relates to the overall environment. This subtle pause, you’ll find, is invaluable in keeping your own bearings in check. Be it public speaking, being put on the spot by your boss with a problem at work, or even getting into a car accident – pause to assess, and then formulate a plan for the next steps.
But what about “doing nothing?” That seems idiotic to let the stock market take 10 or 15 percent of value – sometimes more – from your portfolio while doing nothing about it, right?! That’s why we thought it to be prudent to show what happens on our end – the end of the advisor – in times like this.
Here is how we handle:
…emotion: discussion between each other, and amongst other financial advisors in our peer network. This often leads us to reducing the noise that can be deafening during periods like this – almost to a paralyzing degree. It’s not the end of the world, contrary to what the news might tell us, and in the history of stock markets (including the Great Depression era), the markets historically make a come back eventually, and then move further upward.
... holding tight: there is never a morning in which the stock market opens notably higher or lower, and we make reactionary changes to portfolios. Why not? Well, when we research and define positions (stocks, funds, etc.) that we will add or remove from portfolios, we have, during our research period and follow-on monitoring, assessed that those positions possess relative strength when compared to competing sectors of the market, or competing stocks / funds in the same sector. The positions we aim to invest in have shown some degree of outperformance as they are compared to their peers and competition. Relative strength might be displayed, in a growing market, with stock A was up 3.5% over a month, while stock B was positive 1.2% over that same month – stock A is relatively stronger than stock B. In a down-market, like we are experiencing now, stock A might be negative 4.8%, while stock B is negative 8.7%... again, stock A showing relative strength in comparison.
...doing nothing: we don’t do this as advisors. While no action might be taken in one’s portfolio, our job during these periods turns into one of assessing the investment landscape and discerning how the market has shifted (if at all) to favor other areas of the market. After all, “the market” is simply a vague term to describe the stock market exchanges (there’s a few in the US: S&P 500, NASDAQ, Dow Jones Industrial Average... plus more across the globe). In practice, however, the market is often broken down into sectors (energy, information technology, consumer goods) and further into industry groups (information technology further breaks down to semiconductors, software, tech hardware, telecom). Our research and analysis goals are to explore what areas of the market are falling, which are rising, and the potential costs (financial cost, opportunity cost, etc.) of making changes in one’s portfolio.
During these periods, one of our main goals is ensuring our clients maintain the ability to meet their short-term cash needs and maintain focus on mid- and long-term financial goals by aligning their portfolio to compliment those goals. Short-term cash needs vary from client to client, depending on age, monthly cash flow needs, and risk tolerance. Some clients may require only a small percentage of their portfolio in cash (1-5%), while others would find it more appropriate to maintain 20% or more in cash to ensure their financial needs can be met over the next 12-18 months regardless of market action.
What’s the key takeaway here? If the markets have you feeling uneasy, figure out what you can control. This is most often going to be expenses, but certainly defining how much money you NEED to survive over the course six, 12, or 18 months will enable you to maintain financial control of your life during these periods.
Things that you cannot control, like day-to-day market action, should be left alone and not dwelled upon.
While past market performance is not indicative of what will happen in the future, historical patterns tend to project potential outcomes for the way ahead. So far, every down-market prior to 2022 has returned to previous levels, and continued to rise higher. For now, focus on what you can control... and ignore the noise as much as you can.