Review how to better prepare your portfolio for a downturn – and how to take advantage of one if it occurs.
Market volatility is an inevitable part of investing. And it’s understandable that tumultuous times will likely trigger emotional responses to match. But it’s important to remember to take a deep breath, pick up the phone and talk to a trusted advisor – one who has seen an unpredictable market or two and the subsequent recovery.
Diversification May Help Smooth the Ride
The best-performing asset class often changes from year to year, and as shown in the chart below, the difference between the best- and worst-performing in any year can be significant. Most times this is due to correlation – a statistical measure of how two securities move in relation to each other. If returns are negatively correlated, when one return declines, another return is likely rising. And while diversification does not assure a profit or protect against loss in declining markets, it provides the opportunity to reduce risk, temper volatility and enhance risk-adjusted returns.
- Balanced portfolios may help reduce overall risk.
- Diversification may smooth ups and downs to help ease stress.
- Diversify by asset class and investment styles.
- A broad portfolio offers the potential of better risk-adjusted returns.
- Review your allocation regularly with your financial advisor.
In Market Declines, Opportunity May Arise
Just like life, the market has ups and downs. For example, the chart below highlights several S&P 500 index pullbacks in recent years. While it illustrates that declines are fairly common, it also shows the gains that followed each time. But you have to participate, not withdraw, to benefit from those gains. The chart also reveals that investors who chose to pull their money out of equities during those periods may have missed some of the market’s biggest gains because some of the market’s best days came right after periods of steep decline. Also, remember that a decline can present opportunities to buy quality investments while they’re temporarily undervalued. This can enable you to invest in high-quality companies at lower prices and capture additional value.
- Selling during downturns may lock in the loss.
- Pullbacks and corrections can present buying opportunities.
- Fundamentally sound investments may be discounted.
When considering market volatility, topics you may want to discuss with your advisor include:
- The cause of the recent market volatility and how long might it last
- The possible effect current market conditions may have on your overall financial plan and goals
- The impact to your portfolio and if it should be adjusted
- How to plan for the road ahead and take advantage of opportunities that may arise
Read Weathering Market Volatility