7 Principles for Navigating Market Volatility:

When the market gets rough, it is natural to feel uneasy.  You’ve worked hard to build your practice and your wealth—and sudden drops or headlines can make even the most seasoned investor wonder, “Am I still on the right path?”  

The recent market volatility can be unsettling, but it is a natural part of investing. Perhaps the recent volatility in the market has you contemplating whether or not your investment portfolio is built to weather the storm. Here are 7 investment management principles to help you stay focused, reduce risk, and keep your portfolio aligned with your long-term goals, no matter what the market is doing: 

1. Diversify Your Investments  

Diversification is key to mitigating risk. By spreading your investments across various asset classes, sectors, and geographic regions, you reduce the impact of any single investment's poor performance on your overall portfolio. A well-diversified portfolio can help smooth out returns and provide more stability during market turbulence. 

The current market environment highlights the benefits of diversifying a portfolio for example, to include international stocks. As of the end of day Wednesday, April 9th, the US stock market is down 7.58% for the year (represented by the Vanguard Total Stock Market Index; VTI). However, developed international markets are positive at 2.16% for the year (represented by the Vanguard Developed Markets Index; VTMGX).  

While investing in the S&P 500 (the 500 largest stocks in the US) provides some diversification benefits, investors may miss some portions of the market that are key in a broadly diversified portfolio, such as small company stocks and international stocks.  

2. Stay Calm and Avoid Emotional Decisions  

“We need to get out of the market!” is the impulse some investors may naturally have when market news is bleak. Market volatility can understandably trigger emotional responses that lead to impulsive decisions. However, it is essential to stay calm and avoid making hasty moves based on short-term market fluctuations.  

Consider the chart below and the impact on your portfolio of missing the best days in the market. On April 9th of this year, amidst market turmoil, the US market went up just under 10% in a single day (the 3rd best day for the S&P 500 since 1957)! Investors cannot reliably predict when these best single days in the market will show up, and they can come during turbulent times. 

3. Know your history  

Through wars, recessions, stagflation, pandemics, and more, the markets have rewarded long-term investors. See why it can be important to take a long-term perspective on the markets in the following chart: 

Notice how over the long-term, the market has recovered and even thrived post-recession.  Whether we are headed for a recession or not in our current climate, the risk of leaving the market during a dip can risk the rewards that often follow. 

And if we are heading toward a recession, notice in the following chart how the vast majority of recessions have recouped their losses in the first 3 years since the first month of the recession: 

4. Determine the appropriate asset allocation

Re-examining your risk tolerance based on your personal situation is also an important consideration.  As investors draw near to when they will need to access their portfolio for living expenses during retirement, generally, an appetite for volatility is diminished. In other words, it can be worth giving up higher potential returns for the reduced volatility of other investments such as bonds or CDs. Consult with your Financial Advisor to help determine you have the appropriate allocation based on your current personal situation.

5. Review and Rebalance Your Portfolio 

When a storm hits—like a volatile market—winds may shift and waves crash. Just like a boat may be thrown off course in the midst of a storm, it may be time to adjust the sales, rebalance your weight and reorient direction.  That is exactly why rebalancing and reviewing your portfolio is crucial to keeping you aligned with your long-term financial goals.

When financial waters get choppy, reviewing and rebalancing your portfolio involves adjusting your asset allocation to maintain your desired risk level. For example, if the stock market has declined, your portfolio may become overweight in bonds. In this situation, we would sell some of the bonds in the portfolio and buy stocks while they are low.

Systematic rebalancing involves rebalancing on a pre-determined frequency (i.e., monthly, quarterly, or semi-annually). Using tolerance bands can be an effective way to know when to rebalance while also controlling trading costs. For example, a portfolio with an allocation of 70% stocks and 30% stocks with a 5% tolerance band would need to be rebalanced when the stocks in the portfolio grow to 75% or decrease to 65%. With tolerance bands, the portfolio manager checks the portfolio frequently (i.e., monthly) but only rebalances when needed. At our firm, we do rebalancing checks for our clients every single month.

A financial advisor helping you regularly review and rebalance your portfolio will keep your course charted through the inevitable storms toward your long-term financial goals.

6. Take Advantage of Tax-Loss Harvesting: 

Market downturns can feel like financial setbacks, but they can also open the door to squeezing value out of a sour situation.  If you have a taxable investment brokerage account, tax-loss harvesting is a strategic way to offset gains elsewhere in your portfolio and reduce your overall tax liability.  Just like a dentist might write off equipment that depreciates or becomes obsolete, investors can write off losses against gains. The harvested investment can often be replaced with a similar but not identical asset to maintain your long-term strategy.

By selling investments that have declined in value to offset capital gains taxes on other investments, this strategy can help reduce your tax liability and improve your after-tax returns. 

7. Review Your Financial Plan Regularly: 

Just as a dentist wouldn’t recommend waiting years between check-ups, your financial health also needs consistent attention, especially amidst market shifts, tax law changes, or life circumstances evolving.  Regularly reviewing your financial plan ensures that it remains aligned with your goals and circumstances.

Periodic reviews with your Financial Advisor can help you make necessary adjustments and stay on track. Just like spotting early signs of decay can help prevent costly procedures later, reviewing your portfolio can catch imbalances, unnecessary risks, or new opportunities like tax strategies or retirement savings adjustments before they become problems. If needed, small adjustments can make an impact on your ability to reach your financial goals.

Conclusion

Market volatility is inevitable, but uncertainty doesn't have to derail your progress.  Just like you guide your patients toward lasting health, we love to help guide your financial plan through the ups and downs to align with your long-term vision. 

Whether you’re wondering if your asset allocation still fits your goals, or if you’re unsure how to respond to the recent market swings, or if you want to take advantage of tax strategies, these seven principles are strategies to help you and we’re here to help you weather the storm and stay the course toward your goals of financial freedom. 

If you have concerns or want to discuss how these principles apply to your situation, feel free to reach out to a Financial Advisor on our team, and they would be happy to provide a complimentary consultation.