By Ronnie Thompson
When it comes to the emotion, fear, and uncertainty of market volatility it can drive people to certain behaviors and decisions that could lead to more losses and missed opportunities. The following are 5 things that every person should do and not do when in periods of market volatility.
1. DO Build a strong Boat and stay in it
When designing an asset allocation or portfolio around your financial objectives you must be crystal clear on what you own and the spectrum of volatility that those things can bring. In essence building a portfolio is like building a BOAT. Is the structure and the engine of the boat reliable and can it handle all the different elements and situations it will encounter along the way? How much do expect the boat will “rock” if a storm comes. If the “boat” begins to rock to a point that you become so uncomfortable you consider jumping out of the boat into the dark waters during a storm, then you built the wrong boat.
2. DO NOT Jump to the “alternatives”
Year to date the markets have been extremely volatile with no clear direction on how to improve them and if/when they will improve. On the date I write this article (early JULY 2022) EVERYTHING is in the negative, Short-Term Treasuries are down 3+%, Bonds are down 9-10%, stocks are down 18-20% and cash is losing 9.1% year over year to inflation. When there is no place to hide urgently and erratically trying to find an alternative can in many ways cost you more than if you just stayed the course. I use a local sports example to make the above point. For years Matthew Stafford was the Quarterback for the Detroit Lions football team. He was drafted number one and considered the best Quarterback in the draft that year. For several years prior to his eventual departure many fans were disappointed in his performance and were looking for the team to part ways with him. The problem from my perspective with this thought process is that the “alternative” to Mathew Stafford was not being taken into consideration. The National Football League for years has struggled to provide the talent teams are looking for in the Quarterback Position. Many teams had and were paying much lesser talent than Stafford LARGE sums of money to play for their team because the cupboard of talented quarterbacks was bare if not empty. They traded him anyway and, in the year, following his trade Matthew Stafford was an intricate part in his new team winning the Super Bowl. Like your investments when you are not happy with their performance consider the alternatives?What are they and will they provide you a better outcome? Could what you be trading be the next Super Bowl winner?
3. DO Dollar Cost Average
If you imagine the “stock market” most people will create a picture of the “Heartbeat Monitor” in their mind. A line that goes up and down across the page. Dollar Cost Averaging is an approach that can assist in better outcomes from investing especially in times of volatility. As an example, if you took two people with 100k to invest in this case we will refer to them as person A Jill Sudden and person B Bill Steady. Person A invests all lOOK at once. Person B will invest equal portions of the 100k in over a specified period (1/6th monthly over a 6-month period). When markets are volatile person A’s investment will be at the full mercy of the volatility whereas person B’s deposits will be made after the market has fallen which in turn when the market rebounds that deposit will get the benefit of the discount it was invested at.
4. DO Invest More and Tax Loss HaNesting
Many of us remember the Great Recession of 2008. It is considered one of the most impactful volatility environments the markets in the history of the stock market. Many lost their homes, their business’ and 50% or more of their investments amongst other things. Speaking with people today if they knew then what they have come to know now they would have gone and gotten a loan from a bank to invest in the markets. When markets are down, they present a “discount” to buy in. This is the essence of the investment Golden Rule which is “buy low sell high.” There are three places’ people can invest their money when it comes to tax registration. Pre-Tax like IRA’s and 401k’s, Tax Free like Roth IRAs, and Municipal Bonds, and investments that are After Tax. When it comes to the benefits of After-Tax Investments, they provide a unique capacity to sell and acquire Losses. Why is this important? When markets are down you can sell and repurchase your investment.When you do so you lock in those losses that can be used for up to three years to reduce or in some cases offset the tax you owe the IRS on the gain. Done correctly this process can dramatically reduce the long-term tax liability of your investments. When done during periods of volatility it compounds dramatically the benefits of this application.
5. DO NOT allow UNSTUBSTANTIATED FEAR drive you to make BAD DECISIONS
Panic and fear are a recipe for disaster when a situation or environment changes or becomes negative. Many have gotten severely injured or even died when panicking during a bad situation. The same can occur with your investments. One of the greatest investors of our time Warren Buffet a saying ”The stock market is the greatest instrument on earth for transferring wealth from impatient people to patient people.” The essence of this quote comes the very idea that “impatient” or fearful people tend to overact and in turn miss opportunities that markets provide because of it. If your investments are in line with your Risk Tolerance and properly diversified amongst the appropriate asset classes, this very application allows for you to stay in your seat especially in periods of volatility. Don’t just take the word of the talking heads on the internet, television, or radio as many of them are not in fact the “experts” they are being suggested they are and often have something to sell as an alternative. Do the research or seek the opinion of a disinterested expert when it comes to volatility, why it is happening and the best actions to take moving forward. In conclusion when it comes to market volatility the above list of things to DO and NOT DO are things you can control in uncontrolled periods in the market. It is when things become volatile that it is imperative to take a deep breath, do not overreact and revisit the game plan and objective around your investments and focus on the things you CAN control not the things you cannot.
Ronnie Thompson and Steve Wilbourn are investment advisory representatives of and provides advisory services through CoreCap Advisors, LLC. True North Advisors and CoreCap Advisors are separate and unaffiliated entities. Securities trades are not accepted through email, voicemail or fax. Please contact your representative at the number listed above to place any securities trades. This e-mail message and any attachments are solely for the confidential use of the intended recipient. If you are not the intended recipient, notify us immediately by return e-mail and promptly delete this message and any attachments from your computer. These independent views and opinions expressed are those of Ronnie Thompson and Steve Wilbourn and are not necessarily the opinions of CoreCap Advisors. Investing involves risk and investors may incur a profit or a loss. Any information should not be deemed a recommendation to buy, hold or sell any security. You should consult with a licensed professional for advice concerning your specific situation. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market.
