In light of the recent volatility, we thought this would be a good time discuss whether or not volatility is all bad; we don’t think so. When turning on the radio and television or logging into Twitter, Facebook, LinkedIn or Instagram, one would think that volatility is a terrible thing that requires you to panic and make changes to your portfolio immediately.
There appears to be a pre-notion that market volatility is nothing but a detriment to markets and investors. This is further promulgated by all of the various mediums mentioned. Although there are inherent negative aspects, this line of thinking can be dangerous. Acting solely on short-term volatility can do more harm than good. Volatility can drive the novice investor to question his or her own investment strategies, strictly due to short-term fear. It is crucial for investors to understand that volatility is inevitable and attempting to navigate around it is risky. Markets tend to move up and down in the short-term and volatility should not be the deciding factor as to whether or not investors should immediately exit. With a strong understanding of volatility and its causes, investors potentially can take advantage of investment opportunities which may result from volatile markets.
Although volatility sounds terrifying, it is important for investors to develop a strong working knowledge of it so that they can make educated investment decisions. Market volatility is the statistical measure of a market or security’s tendency to rise or fall sharply within a short period of time. Measured by standard deviation, volatility can be caused by the imbalances seen within trade orders in one direction or another. Volatile markets are characterized by wide price fluctuations and/or heavy trading. It is important to note that there can be many catalysts behind the causes of market volatility. With that in mind, investors can leverage their time more effectively by learning strategies to deal with volatility instead of trying to prevent it.
One effective method commonly used in times of market volatility is to stay the course. This means that as an investor, you ignore the short-term chaos and leave your investments status-quo until the volatility passes. You stay the course despite the current overreaction of the market. Even though this may seem lazy and counterproductive, it may insulate you from losses associated with attempting to time the market. It is virtually impossible to time the top to determine when to get out, and just as difficult to discern the bottom and when to get back in and invest again. Typically, you would be better off to stay the course than attempt to time things and not be able to do it well. This bad timing can further exacerbate your losses during these volatile times.
Market volatility can also create opportunities that an astute investor can use to their advantage. Volatility can provide entry points for those investors whose time horizon and investment strategy is long-term. Downward market volatility presents investors, who are bullish and believe markets will perform well in the long-run, with the opportunity to purchase additional shares at lower prices. Increasing your position at a discount can be a very powerful strategy. In effect, you are lowering your average cost per share of that particular security.
This volatility provides an excellent environment for those with long-term time horizons, especially millennials and later generations, with an opportunity to increase their returns over time by making additional investments. This may sound and feel counterproductive at the time, but could add significantly to the investor’s performance.
It is usually difficult to go against what conventional wisdom may tell you, but investments tend to be one of the things people stay away from when they are on sale. I would argue this is a great time to invest funds that you may have on the sidelines and liquidate and redeploy underperforming assets in order to get this money to work while the opportunity presents itself. This thinking must be also in line with your risk tolerance, time horizons and overall objectives.
Volatility should not been seen as an evil to your portfolio. Assuming you have a plan that outlines your goals, objectives, and time horizon, you will want to maintain the course of the plan during both robust and difficult times. It is ideal to make sure you revisit this at least annually with your advisor and make changes accordingly. The first thing you should consider when volatility strikes is whether any of these areas have changed recently and you should update your advisor accordingly. The goal is to have a plan before the storm hits and understand the plan to get you through the storm. As we have seen time and time again, the storm always ends and brighter days with less volatility are ahead.
No matter how you elect to handle your investments during times of market volatility, it is very important to review your portfolio with a qualified financial advisor. Having a distinct philosophy for all markets will help you navigate without emotion. Please contact us if you do not have a plan to weather volatile times and would like to develop one. This will not be the last period of volatility we see and you will want to make sure you are ready for the next time. Contact Mitlin Financial at (631) 952-4466 x12 and allow us to help you navigate in a fashion that is conducive to your goals, investment needs, and risk tolerance.
This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.