After a nearly 12 year bull market, 2022 was the first truly down year we have seen in the stock market in quite a while. And after a nice relief rally to start 2023, the last few weeks have brought back some downward pressure which all adds up to a wild ride we’ve been on these past months. In the face of that kind of volatility, and the inevitable onslaught of sensationalism in the media, it can become extremely difficult for investors to keep a level head.
The bad investor behavior traits that tend to derail long-term portfolio success are hard to beat back in times like this, but with that goal in mind, here are a few strategies that might help investors maintain their resolve and weather the stress of volatile markets.
- Have a plan
The benefits of a well-thought-out financial plan cannot be overstated. By focusing on your short-and long-term goals, and creating an investment strategy designed to address those specific issues, you can greatly increase the chances of staying on target during times of heightened volatility. Studies show that clients with a financial plan in place are much better prepared for the important financial milestones that concern most of them, which, in turn, significantly increases their odds for success. For example, an international HSBC study, “The Future of Retirement in 2011”, showed that those with financial plans accumulated nearly 250% more retirement savings than those without a financial plan in place. Furthermore, nearly 44% of those who have a financial plan in place save more money each year for retirement. Have a plan, and stick to it.
- Diversify your investments
It’s amazing how often we see a new client walk in the door, and show us a portfolio consisting almost entirely of his or her company’s stock, without any sense of how precarious this situation can be. The client’s income, benefits, investment portfolio, and even retirement account balances all depend on the health of her employer. In essence, the person’s entire financial life is tied to that one company, and regardless of how great the widget that company makes might be, it can backfire in a big way. Just ask the former executives of once-great companies like Enron or Lehman Brothers. The adage “Don’t have all of your eggs in one basket” is as old as investing itself, but it is not always easy to keep top of mind. For example, the outperformance of U.S. Large-Cap Growth Stocks (think big tech) over U.S. Large-Cap Value Stocks (think consumer staples) during the bull market the past five or six years caused many to question the effectiveness of a diversified portfolio strategy. However, during the downturn last year, it was those value stocks which held up much better, and the growth stocks which were battered so mercilessly instead. Had we all abandoned our diversification strategies, and piled into those growth stocks during the run-up, the pain we all felt last year would have been much, much worse. As is usually the case, the arguments for discarding time-tested long-term strategies due to short-term dislocations, tend to falter under the weight of time.
- Don’t try to time the markets
If the ‘great recession’ taught us anything, it is that markets tend to rebound when you least expect them, and they tend to do it quickly. In March of 2009, the S&P 500 was at 666, and no one seemed to know just how low it might go. By September of 2009, just six months later, the S&P 500 stood at 1025, an increase of over 50%. Staying invested in the face of downward momentum may take a strong stomach, but bailing out with the idea that you will jump back in once the market turns, is a recipe for disaster. First, by getting out while the market is falling, you turn paper losses into real losses. Second, since picking the actual bottom is extremely difficult, if not impossible, you are likely to suffer the doubly-whammy of missing out on the best of the rebound as well.
- Turn Volatility into Opportunity
It never feels good to see the value of your investment portfolio dropping, but this kind of volatility can actually be a good thing for many investors. Let’s say you go to Macy’s and see a jacket you love that costs $100. The next week, you see the same jacket on sale for $75. Great, you think, time to pull the trigger. But, instead you decide that you prefer to wait until the price goes up to $150, and then you’ll have to have it. This makes no sense, right? Yet this is exactly what millions of investors do on a consistent basis. When the market is up, they feel great about it and cannot wait to commit more money to it. When the bear market hits, they get spooked and tend to want to wait it out until things look better. March 2009 may have been the greatest time to buy stocks that any of us will see in our lifetime, yet virtually no one wanted to invest in the face of all of that negativity. If we can understand that volatility is not only natural, but necessary, and treat it as an opportunity, by adding capital to our portfolio during times of downward pressure, we will likely be rewarded over the long-term. Better yet, if we can continually contribute on a systematic basis (dollar cost average), we can take advantage of volatility throughout all market cycles, by buying less shares when the market is high, and more shares when it is low, thus taking emotion and guesswork out of the equation.
- Stay focused on Your Goals
By focusing on the goals we have set for ourselves (see ‘have a plan’ above), we naturally take some of the emphasis off the short-term noise, and concentrate on what we are trying to achieve over the long-term, which can help us stay the course. This is not so easy to do, particularly when the mainstream media machine gets kicked into full-on fear-mongering. Negativity bias causes us to instinctively focus more on bad news, rather than good, which makes sense from an evolutionary standpoint where we are hard-wired for survival. If we’re trekking through the woods, this instinct can be very useful, and even keep us alive; but in investing, it can be extremely detrimental. It can cause us to dwell on negative news, and potentially overestimate the risk we may be exposed to, which in turn can cause us to make emotional decisions regarding our investments – generally a very bad thing. By staying focused on our goals, and the strategies we have designed to help address them, we can take some of the emphasis off of short-term events, thus increasing our ability to stomach volatility and stay on-course.
Maintaining a long-term outlook and keeping your emotions at bay during volatile markets isn’t easy. It takes a strong stomach, and for many, help from a professional as well. If you can manage it, however, the rewards may likely be significant, and keep you from falling into the same behavioral traps that have plagued so many investors for so long.
This commentary on this website reflects the personal opinions, viewpoints and analyses of the Topel & DiStasi Wealth Management, LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Topel & DiStasi Wealth Management, LLC or performance returns of any Topel & DiStasi Wealth Management, LLC Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Topel & DiStasi Wealth Management, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.