Market Volatility is Not to be Feared
Do you think the markets are crazy? How about with the current global pandemic and the pending elections, then surely, we are in unprecedented times and this time is truly different? Correct? If you watch the financial news, then you hear regularly about the swings in the market. What about the most recent news about the CPI dropping by 32.9% – surely these are end-times and we should all panic.
Most financial news, news in general, is designed to get readers and website clicks. The news business has morphed from providing news and letting you decide your opinion to now the news provides you with an opinion and it’s your job to decide on the facts.
These times are scary and Covid-19 and the Elections provided even more drama. These times lead to an effect I call the COVID Freeze. But if we keep in mind that the nature of journalism has changed. For example, the CPI drop of 32.9% is accurate – but it also an ANNUALIZED number – the real drop, expected and horrible was bad – but not that bad. The press runs with the most dramatic number to get website clicks – they are fighting for the survival of their industry.
What is Market Volatility
All of this brings me to the topic of market volatility. Volatility is simply a statistical measure of the standard deviation of the stock price or index from its average. Although volatility has negative cognitions, however, this is what will provide you with a successful retirement and your grandkids with a legacy. Without market volatility – like investing in cash – you remove the risk and risk is why you get paid a premium to invest in volatile assets like equities. So, simply put your reward for investing in stocks is derived from the volatility.
We provide comprehensive financial planning and investment management for our clients. When we design portfolios for clients, we need to understand several things like the client’s risk capacity and risk tolerance. Then we can design a model allocation that has enough risk to meet the client’s long-term goals. If we take no risk – like 100% in cash, then the portfolio will lose purchasing power daily due to inflation and taxes.
However, a portfolio that is 100% in Emerging Equities would be way too risky (volatile) to tolerate. So, therefore it is an imprecise art to land on an ideal portfolio. However, whatever the allocation decided upon, the return is partly due to the risk we assumed by accepting the ownership of volatile assets.
You are rewarded for taking a measured amount of risk in your investments because the risk premium is what drives your returns.
What Can You Do?
Ensure you have a comprehensive financial plan and align your investment model with your goals, values, and risk tolerance. Avoid changing your investment model due to political, economic, or financial press. You should change your goals and model when your facts change. Working with a professional advisor can earn you up to 3 percent extra return per year. Click HERE for a Vanguard White Paper describing this Advisor Alpha effect.