Two months ago, we wrote about the fears of higher inflation and increased volatility (think wide price swings) that were plaguing the stock market. Over the last two weeks, volatility has staged a comeback and is attracting more attention. This time, the narrative surrounds potential trade wars, data privacy issues, and government investigations.
History has shown that bouts of volatile prices tend to cluster for stretches of time. These ups and downs are part of normal market behavior. Prior to this year, we’ve had relatively calm seas for a long time, so whenever big waves come in, they get our attention. We are expecting more volatility to come and view it as an opportunity rather than a threat.
Our process revolves around four main aspects: being proactive, using weakness to rebalance accounts, communicating with our clients, and serving as our clients’ emotional surge protector. All four typically come into play in times of wild market swings.
Being proactive means trimming winners and taking gains in your account on the way up, but also being cognizant of our “down 20%” threshold. The latter causes us to take a long hard look at any stocks we own that have a 20% loss from our purchase price. Each situation is unique, but in general, we like to cut our losses around this level and move on to a better idea.
Using weakness to rebalance accounts looks like this. Let’s say you have a target mix of investments (what we call an asset allocation) of 75% stocks and 25% bonds. If stocks drop 10% and bonds stay relatively flat, then your account will be underweight to stocks. Through our account monitoring and review process, we’re able to rebalance back to your target weight with minimal friction costs.
If you’ve been a client of ours for any period of time, you know that we are active communicators. It’s our goal to address your concerns head-on. Sometimes we’ll be able to do this via an email, blog post, or quarterly letter. Additionally, we have an open-door policy and can easily be reached over the phone if you want to discuss the markets, your accounts, what’s new in your life, etc.
Lastly, you hire us to be an emotional surge protector, someone who isn’t you to manage your investments and provide you with financial advice. Successful investors share some common traits: perseverance, patience, and discipline are three of them. Patience can be tested when markets turn volatile, but timing the market doesn’t work. It’s a fools game. Remain invested, rebalance when opportunities arise, rinse and repeat.
The headlines rattling markets now will soon be forgotten. Like we said in February, what’s triggering negative sentiment today is just a tiny spatter of paint on a van Gogh piece.
