5 Things You Can Do Now to Minimize Trauma From Market Volatility

By Neil Chapman, JD, CFA
Director, Chief Investment Office

If you recently opened your investment account statement for a 401(k), IRA or personal investment account, your heart may have skipped a beat. Every investor has experienced the downside volatility that has occurred so far this year. Markets do not like uncertainty, and there is plenty – high, persistent inflation, a Federal Reserve that is intent on aggressively raising interest rates to fight inflation, a war in Europe, just to name a few. So, how does an investor stay resilient in a volatile market that may not end soon?

​Know What You Own

If you have not already taken an inventory of what you own in your investment account, this is an important time to do it. Many investors have a collection of mutual funds and ETFs in their account, meaning they own hundreds of stocks. There can be considerable overlap in the individual holdings in the funds, reducing diversification and introducing unwanted risk into your portfolio.
 
Popular index funds, such as an S&P 500 Index fund, can also have hidden risk. At the beginning of the year, tech stocks had become a large weighting in the S &P 500 at almost 30%, and energy represented about 2.5%. Through June 22nd, tech has been one of the worst-performing sectors (-27.3%), while energy has been the best performing sector (32.4%).
 
Take a Tactical Approach

As an investor, stay focused on your long-term goals and do not panic. This does not mean, however, that you should just sit by and ride out a market downturn.
 
Some asset classes do not typically perform well in certain economic environments. For instance, large cap value-oriented stocks, such as dividend-paying stocks, perform better than large cap growth stocks in a market environment such as the one we have now. For this reason, you may want to shift your equity exposure towards value-oriented stocks. 

Remember Cash is an Asset Class

Cash is not an asset class known for high returns, but it can provide diversification in your portfolio, given its low correlation to other asset classes. This can offer protection against volatility. Cash has provided a better return this year than stocks and even short-term bonds, and cash provided a better return than stocks and most bonds during the high-inflation period of the 1970’s. Importantly, cash reserves can come in handy in down markets so that you have funds available to buy attractive assets at a lower price.
 
Buy Assets While They’re on Sale

In a market downturn, get your shopping list of stocks and bonds ready. Downside market volatility creates good opportunities to buy good companies with their stock price on sale. Even though there are times when the market trend is not favorable to own stocks, performing solid fundamental analysis, you will have the opportunity to buy profitable, growing companies whose stock has been unfairly punished. Patient investors have been rewarded when markets inevitably return to an upward path. 
 
Seek Professional Help
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If you have a cough or fever, you consult your doctor. If your check engine light is on, you talk with a mechanic. If your investment account balance has taken a hit, you should see an advisor.
 
If you do not have the will, skill, or time to manage your assets, and you are concerned about market volatility, do not hesitate to talk to a financial professional. Look for advisors with designations such as CFP® and CFA. Meeting with an advisor to review your financial plan, and determine steps you may need to take, can help protect you and prepare you for the opportunities this market is creating.