The stock market has gotten off to one its worst starts ever for a year—on last Friday alone, the S&P 500 and the Dow Jones were both down over 2%,1 and for the year the Dow has already declined over 1,400 points. Both indices are down some 8% for the year,2 and it’s still just January! Fears over China’s slowdown, cratering oil prices, and iffy corporate profits have many investors worried about what lies ahead.
In fact, a recent survey conducted by the American College showed that over 60% of retirement income specialist’s clients were concerned about the recent market volatility and their retirement security.2 Does January’s market volatility have you concerned too?
Use Market Volatility as an Opportunity to Review your Risk Tolerance
If the sting of January’s to-date market decline is making you lose sleep at night, it’s possible that you are taking-on too much risk in your portfolio, and perhaps you are over-allocated to stocks. If you barely noticed the downside or it didn’t faze you much, then you could be in good shape and don’t need to change anything.
With this in mind, we believe the market volatility actually presents investors with a unique opportunity: to reassess how comfortable you are with risk and to make adjustments based on your comfort level.
When you think of the word “risk” in the context of investing, which of the following words comes to mind first?
Investors who associate risk with “danger” or “uncertainty” should probably have lower equity exposures in their portfolios, instead favoring higher cash, fixed income, or tactical strategy allocations (we’ll cover more on those below). If you think of risk as a “thrill” or an “opportunity,” you may be more comfortable stomaching market gyrations in hopes of eventually achieving greater rewards.
Of course, the ever-changing market environment can influence how investors perceive risk. During economic expansion or peak years when investment returns are high and stable, substantial risks may not seem so substantial. However, during unstable economic periods or contraction years—or when there is elevated volatility like we’re seeing now—substantial financial risks may seem overwhelming.
As a bull market matures and an economic expansion cycle starts to wear-on (we’ve been in this one since 2009, or almost seven years), it’s possible that more volatility sets in. For investors, this could mean making some portfolio adjustments in an effort to reduce downside impact, but it could also mean sacrificing some upside returns if the downside is temporary and the market continues an upward trend. It’s a trade-off that investors should take plenty of time to assess with the help of a financial advisor.
Consider a Strategy Designed to Limit Downside During Turbulent Markets
Investors can address risk levels in their portfolio in a number of ways—increasing your cash balances, having a higher allocation to high quality fixed income, or by allocating a portion of your portfolio to a tactical strategy. The last option—using a tactical money manager strategy—can be useful for investors concerned about prolonged market declines.
Tactical money managers typically maintain a flexible approach to investing, based on market conditions. If they sense that a prolonged downturn is ahead, they may increase cash balances or move into securities designed to limit downside. WrapManager has evaluated several tactical money managers over the years, and we have two in particular now that we are recommending to our clients.
To get more information about these strategies, simply give us a call at 1-800-541-7774 or contact us here and we would be happy to discuss the details with you. While there is no guarantee that a strategy can avoid losses, a strategy with such flexibility could be an important portion of your diversified portfolio.
1. ABC News