The new normal on Wall Street appears to be wild fluctuations, like the Dow Jones Industrial Average 1000-point drops earlier this year and the rapid-fire price reversals that can shift the mood from optimism to pessimism in a matter of seconds. There have already been 28 trading days in 2018 on which the Standard & Poor’s 500 stock index has closed up or down by more than 1%, compared to just eight days in all of 2017. If the current pace of 1% swings persists through year-end, the large-company stock index would be on track for its most volatile year since the financial crisis.
A 500-point Dow sell-off today does not pack as devastating a punch as it did 30 years ago, when the blue-chip stock index was at a much lower level. The Dow’s 572-point drop Friday, April 6, totaled just 2.3%. And the 1,175-point dive in February did not even add up to a 5% drop. In contrast, on Black Monday in 1987 the Dow’s 508-point decline equated to a loss of 22.6% — its biggest one-day percentage decline in history.
Volatility tends to make investors feel uncertain and fearful about what could happen next, and that often prompts them to make rash decisions that are not ultimately in their best interests. Here is some advice for times of volatility. Do not panic. Panic is not an investment strategy. The best thing to do when the markets get turbulent is to take a step back and ask yourself what your purpose for investing was in the first place. How can you thoughtfully adjust your investment strategy to stay on track toward achieving your goals? Volatility is likely to remain high this year, so investment discipline remains essential. Investors should avoid overreacting to geopolitical developments and stick to their long-term financial plans. One way to ignore your self-doubts during market crises is to heed what decades of practical and academic evidence have taught us about investing: capital markets’ long-term trajectories have been upward. Thus, if you sell when markets are down, you’re far more likely to lock in permanent losses and pay avoidable taxes than come out ahead.
We are presently in the later stages of the current economic cycle as well as the ninth year of the current bull market. Escalating market volatility is consistent with late-cycle economic and market tendencies. In this volatile environment, we should not fixate on the news, but we should be attentive to it. Triggers for volatility can be varied, like policy uncertainty in Washington or Beijing, earnings reports, and geopolitical unrest. Despite the recent news, the economy’s underlying fundamentals remain strong as it keeps chugging along. Positive GDP growth in major developed and emerging markets is expected this year, and large fundamental economic drivers continue to remain in expansionary territory. That means investors will eventually start to look at earnings again and realize that healthy results from Corporate America should lead to higher stock prices — no matter what President Trump is tweeting about.
Attempting to move in and out of the market can be costly. Research studies show that the decisions investors make when to trying to time the market, i.e. getting in and out, cause those investors to perform worse than they would have if they had just stayed in the market and held on.
With most personalized financial plans, there is a risk-tolerance profile associated with the plan. During low volatility periods it may be easier to stomach your perceived risk than when volatility is much greater. Thus, now is the perfect time to check your risk profile and make sure you are comfortable with it. Your time horizon, goals and tolerance for risk are key factors in helping to ensure that you have an investing strategy that works for you. Even if your time horizon is long enough to warrant a non-conservative portfolio, you have to be comfortable with short-term ups and downs along the way.
It is also a good idea for investors to re-examine their holdings. During times of greater volatility, the downturns can be opportunities to buy more of the depressed (lower-priced) holdings that fit into your long-range investment plan. They may also be an opportunity to buy the investment that you “missed” on the way up. These could be in areas of the market that were perhaps overlooked or overvalued before the downturn began. This can be done with new money or by rebalancing what you have got by taking some profits in the portfolio. If there is any silver lining to volatility, it is that it can allow you to make adjustments to your portfolio that could be beneficial over a longer period of time. At Bowen Asset, we recently took profits in an investment that did exceptionally well. We also significantly underweighted another investment due to a change in our thesis as a result of congressional stagnation. But whatever changes you make, be sure you are basing them on fundamentals, not on the market’s ups and downs.
Depending on market conditions as well as your own circumstances, you may be able to use tax-loss harvesting to turn financial lemons into lemonade during market downturns. A successful tax-loss harvest lowers your tax bill without substantially altering or impacting your long-term investment outcomes. This action is not without its tricks and traps, however, so it’s best done in alliance with a financial professional who is well-versed in navigating the challenges involved.
Investing should always be a process over time and never about a moment in time. Corrections tend to be processes and not momentary. Now is an incredibly important time to make sure you maintain that discipline and use diversification and rebalancing to your benefit. One thing you can do is make sure that your portfolio is sufficiently diversified. Having a broad mix of investments — stocks and bonds — across sectors and asset classes can help you weather volatility. Just remember, market setbacks have typically been followed by recoveries.