This week, Senior Financial Planner Gabe Adams CFP®, MSPFP, shares tips on how to deal with market volatility and stay focused on the long term.

Transcript

Hi Everyone, welcome to the weekly market update. It’s been a tough stretch for financial markets, with the global stock market down more than 15% and the U.S. bond market down more than 9% year to date. Against that backdrop, it’s a good time to discuss how to deal with market volatility and how to stay focused on the long-term. Our own Wealth Manager Bradley Johnston recently wrote a great piece about this topic, which I’m going to highlight today.

We know market volatility can be scary, especially if you are nearing retirement or have other major expenses on the horizon. With heightened volatility, you may be tempted to sell and go to cash. But as difficult as volatile markets may be, they’re a normal part of investing. Let’s discuss Bradley’s tips to help you weather the storm as a long-term investor.

Tip #1 – Stay invested

Fear-driven selling based usually on panic, may be the single biggest mistake investors make during periods of market volatility. It’s very difficult if not impossible even for investment professionals, to time the market. Most investors who try doing so end up missing out on significant gains.

When speaking about market volatility, Creative Planning CEO Peter Mallouk often notes the one thing all bear markets have in common – they all eventually end.

That said, sometimes it takes years for the market recovery to occur after a bear market — but history shows markets will eventually rise again. But if you take your money out of the market, you’ll realize any portfolio losses and miss out on an opportunity for those future gains. Missing just a few days in the market over long time period can greatly impact your performance.

Tip #2 – Maintain a diversified portfolio

Portfolios that are concentrated in a few investment types, sectors or industries can be risky. Performance of various asset classes varies greatly from year to year, which is why it’s important to spread your risk out across multiple asset classes. Diversification, often referred to as the one free lunch in investing, typically helps avoid the severe downside of market fluctuations. To dampen volatility over time, diversify across different asset classes, sectors and geography.

Tip #3 – Understand your risk tolerance

It’s important to maintain an appropriate level of portfolio risk based on your risk tolerance, current financial situation, future income needs and long-term goals. Determine a level of portfolio risk you feel comfortable with in advance. And when volatility arrives, hold true to your objectives. Having a portfolio that’s too aggressive increases the likelihood you could make an emotionally driven decision. Conversely, a portfolio that’s too conservative may make it more difficult to outpace inflation and accomplish your goals.

Tip #4 – Differentiate between long-term and short-term goals

No doubt you’ve heard us stress the importance of maintaining a long-term, goals-based approach to investing.

One way to deal with short-term volatility while remaining focused on the long term is by following the five-year rule. This rule dictates that any assets needed within the next five years should be conservatively invested. If you anticipate a large expense in the next five years such as retirement, a new home, a wedding, etc., you should invest accordingly in a short-term asset with an appropriate level of liquidity. Your other assets should remain invested in a diversified portfolio consistent with your long-term goals.

We’ve included a link to Bradley’s article with this video, and I strongly encourage you to read it. As always, please reach out to your Wealth Manager have any questions or concerns. We hope you have a great weekend, and please join use next time for the weekly market update.

 

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