Market Volatility Could Pay Off in the Long Run

February 20, 2018
Greg Wambolt

More Normal Than You Think…

After a stellar stock equity market run in 2017, market volatility is back in 2018. While disquieting, market volatility is as old as, well, the markets. And could pay off in the long run.

Just last month, we shared with you Katie Stockton’s prediction of a correction or pullback in the markets into February. Now that Ms. Stockton, BTG’s Chief Technical Investment Strategist, and other prevalent market analysts have been proven right, what’s the best course forward?

  • Stay disciplined and focused. There is no solid economic reason for the fall in market prices and economists remain optimistic on the market due to many factors, including strong economic and job growth projections. Bear markets characterized by a 20% decline in the stock market are relatively rare. According to ClearBridge Investments, only six times in the past 92 years did the markets hit bear market territory. What’s more, in those same 92 years, bull markets returned 20% or more a total of 34 times. That’s six times bear, 34 times bull—history strongly supports staying the course.
  • Take a look at your holdings. Are they diversified into non-correlated asset classes that help ensure your portfolio doesn’t track up and—more importantly in a jumpy market—down at the same
    time? We can also consider whether individual assets may have overshot their value. With interest and inflation rates still low, this is unlikely, but an area we are monitoring. Consider buying stocks that are cheaper now, and meet your investment goals, in hopes of eventually selling high.
  • Keep an eye on the bond market. Should stock market volatility continue, more investors may look to bonds to quiet the portfolio. Bond preferences may, however, shift away from high-yield bond funds to less risky investments until volatility settles.
  • Avoid knee jerk reactions. Bailing out on stocks during a market blip could mean passing on potential gains when stocks rebound. Market corrections, or a drop of 10% or more, are to be expected. Since 1900, there’s been an average of at least one market correction per year. Market corrections are likely to happen throughout the year so weigh each correction relative to its impact onyour portfolio before making adjustments.

When the market takes a hit, it may take a while for nerves to calm. Despite the volatility we’ve seen so far in 2018, Jeffrey Schulze, Director of Investment Strategy at ClearBridge Investments, says, “Those dynamics that have made the last couple of years such a fantastic place for equity investment are very much still in play.”

We’re following market developments closely on your behalf, and you can expect to hear more from us. Don’t hesitate to contact us if you want to discuss any of these items in the context of your portfolio.

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