Market Volatility – Panic has a Price

Market volatility is part of the deal when investing for the long-term. Currently, some of the volatility is due to inflation and the invasion of Ukraine but most of the volatility is from fear of the unknown (by market participants). We’ve had many periods that generated panic and each time an emotional reaction or seeking ‘safety’ had a price.

Since 1960, the markets have dropped more than 30% during seven crises.

Instead of seeking ‘safety’ during a crisis, we encourage you to let us do what we do best and make the most of these crises and instead focus on things that you directly control.  The best way to handle market volatility is to have a plan in place and let it be executed without ‘fear’.

So, what should you do during periods of volatility?

  1. Take care of your health by not over focusing on media hype – crises are a bonanza for media outlets. For example, CNN searches were up from 89% to 193% during March of 2020. ‘Googling’ trending topics only makes us more anxious. Online searches will not guide you to how your portfolio and your finances should be managed to get you to your goals.
  2. Do not check your portfolio every day but do evaluate your anxiety level – if you find that you are overly anxious then we need to re-examine your asset allocation once the market recovers. Keep in mind that unless you depend on the portfolio for cash support, what happens in the market today is not relevant.
  3. Monitor your cash flow – ensure that you have the cash flow you need and that you have the necessary emergency fund.
  4. If you have a long-term horizon (meaning that you are not planning to draw from your portfolio over the next 3 years) then view the volatility as dips that we will use to reallocate your portfolio.
  5. If you depend on the portfolio for ongoing cash flow and we developed a distribution plan for you then you have a withdrawal plan for the next 3-5 years regardless of the market dip. Stay within planned spending.

I don’t deny that there is good reason to be anxious about the war in Ukraine and the impact it will have on our lives and the economy. Even so, this is not the time to decide that you want to make your portfolio ‘safer’. ‘Safer’ often means going to cash or bonds but the time to move to cash is when markets are doing well not during a crisis. During a crisis the ideal action is to use cash to buy positions that will benefit your portfolio in the long-term even if they underperform in the short-term.

The graph below illustrates how a hypothetical “fearful” investor, who chose safety during market downturns of 30%, missed gains time and time again during market recoveries. This investor traded long-term results for short-term comfort likely because the constant drumbeat of negative news made it difficult to stay true to the investment plan.

But how about market timing? Research shows that market timing strategies do not work well for individual investors. Dalbar’s Quantitative Analysis of Investor Behavior measured the effects of individual investors moving into and out of mutual funds. They found that the average individual investor returns are less—in many cases, much less—than market indices return held through the crisis.

But how about, “it is different this time”? Of course, each crisis is different BUT the US has experienced 26 bear markets since 1929 and the markets recovered all 26 times though some took a long period of time to recover. The key to market recovery is that businesses must continue to make profits.
If you find that you are overly anxious about your portfolio, then record this in your Aikapa folder and let us seriously address your portfolio allocation and the tradeoff to your long-term goals once the market has recovered.

If you find you have unexpected/unplanned cash flow needs from your portfolio, then let’s talk about it and find ways to provide what you need today minimizing damage to your long-term plans.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Your Portfolio Allocation and Emotional Reactions: The Coronavirus and Portfolio Discipline

Here we go again – we’ve been down a similar road before, so none of this is news to those who have been with us through prior overreactions by market participants.

Volatility is part and parcel of participating in the market. When fear grips the market, selloffs by those who react to that fear provide portfolio opportunities for those who understand and adhere to a strategy. It is AIKAPA’s strategy to maintain your risk allocation and either ride out the volatile times or rebalance into them. Meaning that if you don’t need cash in the short-term, we buy when everyone else is selling.

As news of the Coronavirus (or other events outside of our control) stokes fear and uncertainty on a variety of fronts, it is only natural to wonder if we should make adjustments to your portfolio. If you are reacting to fear, then the answer is a resounding NO. On the other hand, if you are applying our strategy in combination with an understanding of the impact on business, then the answer is likely YES. When an adjustment is indicated we look for value and BUY while selling positions that are relatively over-valued. If the market continues to respond fearfully (without a change in value) then we will likely continue to buy equities and may sell bonds to fund those purchases. The only caveats to this strategy are that we must know that you don’t have short-term cash flow needs, that we stay within your risk tolerance, and that we are buying based on current value (keep in mind that value is based on facts not fear).

If you feel compelled to do something, then consider the following:

  1. Contact your mortgage broker and see if it makes sense to refinance (likely rates will drop soon after a significant market decline).
  2. Seriously examine the impact this has on your life today and let’s talk about changing your allocation once markets recover.
  3. Review the money you’ve set aside for emergencies and prepare for potential disruptions if these are likely.
  4. Business owners should consider the impact (if any) on their business, vendors and employees. Particularly important will be to maintain communication with all stake holders and retain a good cash flow to sustain the business if there is a possibility of disruptions.
  5. Regarding your portfolio, if you have cash/savings that you want to invest, this is a good time to transfer it to your account and have us buy into the market decline.

Market changes are a normal part of investing. Risk and return are linked. To earn the higher returns offered by investing in stocks, it is necessary to accept investment risk, which manifests itself through stock price volatility. Large downturns are a common feature of the stock market. Despite these downturns the stock market does tend to trend upwards over the long-term, driven by economics, inflation, and corporate profit growth. To earn the attractive long-term returns offered by stock market investing, one must stay invested for the long-term and resist the urge to jump in and out of the market. It has been proven many times that we can’t time stock market behavior consistently and must instead maintain portfolio discipline (if you want a historical overview of markets, see the “Market Uncertainty and You” video on our website www.aikapa.com/education.htm).

It is your long-term goals and risk tolerance that provide us with our guide to rebalancing and adjusting your portfolio, not short-term political, economic or market emotional reactions. In your globally diversified portfolio, we will take every opportunity to rebalance and capture value during portfolio gyrations. This IS the benefit of diversification and working with AIKAPA.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com