Stock Market Volatility....It's back. Now, here's how to handle it!

For the U.S. stock market, 2013 was a year of mostly ups, very few if any downs and volatility was minimal. This is analogous to the weather in San Diego or Hawaii; very predictable, comfortable with very few surprises. Whereas, in the Midwest, the old saying goes, "if you don't like the weather wait a minute." 

Well, yes, the Midwest, and specifically the great KC metro area, does not have the calm and comfortable weather of either of previously noted areas. However, we do have a much lower cost of living, lots of green space, friendly people, great barbeque and other advantages. 

Thus, if you look at the weather over the entire year, it's actually not bad, versus focusing in on the harshest days of winter or summer. This is similar to the stock market. Overall its performance is quite positive over the long-term, versus uncomfortable over short periods of time. 

Conventional wisdom says that what goes up, must come down. Though there's no foolproof way to handle the ups and downs of the stock market, the following common sense tips can help. 

EggsDon't put your eggs all in one basket  

Diversifying your investment portfolio is one of the key tools for trying to manage market volatility. Because asset classes often perform differently under different market conditions, spreading your assets across a variety of investments such as stocks, bonds, and cash alternatives (for example, a money market fund or other short-term instruments), has the potential to help reduce your overall risk. Ideally, a decline in one type of asset will be balanced out by a gain in another, though diversification can't eliminate the possibility of market loss. 

Focus on the forest, not on the trees  

As the market goes up and down, it's easy to become too focused on day-to-day returns. Instead, keep your eyes on your long-term investing goals and your overall portfolio (see my weather comments above). 

StairsLook before you leap  

When the market goes down and investment losses pile up, you may be tempted to pull out of the stock market altogether and look for less volatile investments. The small returns that typically accompany low-risk investments may seem attractive when more risky investments are posting negative returns. 

But before you leap into a different investment strategy, make sure you're doing it for the right reasons. How you choose to invest your money should be consistent with your goals and time horizon. 

If you still have years to invest, keep in mind that stocks have historically outperformed stable value investments over time, although past performance is no guarantee of future results. If you move most or all of your investment dollars into conservative investments, you've not only locked in any losses you might have, but you've also sacrificed the potential for higher returns. 

Silver liningLook for the silver lining and make dollar cost averaging work for you  

A down market, like every cloud, has a silver lining. The silver lining of a down market is the opportunity you have to buy shares of stock at lower prices.

One of the ways you can do this is by using dollar cost averaging. With dollar cost averaging, you don't try to "time the market" by buying shares at the moment when the price is lowest. In fact, you don't worry about price at all. Instead, you invest a specific amount of money at regular intervals over time. When the price is higher, your investment dollars buy fewer shares of an investment, but when the price is lower, the same dollar amount will buy you more shares. A workplace savings plan, such as a 401(k) plan in which the same amount is deducted from each paycheck and invested through the plan, is one of the most well-known examples of dollar cost averaging in action. 

For example, let's say that you decided to invest $300 each month. As the illustration shows, your regular monthly investment of $300 bought more shares when the price was low and fewer shares when the price was high: 

DCA Chart

Although dollar cost averaging can't guarantee you a profit or avoid a loss, a regular fixed dollar investment may result in a lower average price per share over time, assuming you continue to invest through all types of markets. You should consider your financial and emotional ability to make ongoing purchases, regardless of price fluctuations, however.

(This hypothetical example is for illustrative purposes only and does not represent the performance of any particular investment. Actual results will vary.) 

Don't count your chickens before they hatch  

As the market recovers from a down cycle, elation quickly sets in. If the upswing lasts long enough, it's easy to believe that investing in the stock market is a sure thing. But, of course, it never is. As many investors have learned the hard way, becoming overly optimistic about investing during the good times can be as detrimental as worrying too much during the bad times. 

Let's get some perspective  

A decline of a stock index's price of 10% or more is considered a correction, whereas a decline of 20% or more is considered a bear market. Well, I don't know what is ahead, but I would welcome a correction. It would bring stock prices down to a little more reasonable level and bring new money in that has been sitting on the sidelines. 

Bottom line, if you're on an airplane or cruise ship and the captain says he is going to make a course correction to get back onto the best route; would you be concerned? I think not, if anything you'd be relieved. Well this is how I feel about any market corrections at this point. That being said, the most recent bear markets (2000-2002 and 2008-2009) both drove the point home that panicking, selling and abandoning good long-term investment strategies don't do anything but cause losses and disappointment in hind sight. 

As such, the right approach during all kinds of markets is to be realistic. Have a plan, stick with it, and strike a comfortable balance between risk and return. Sometimes just doing nothing is the best approach. Just like the freezing cold winter we're enjoying currently, this too shall pass and before long spring will be upon us, and it will be back to kids playing outside, barbequing in the backyard and sitting on the patio and relaxing after mowing the grass.

Integrity Advisory (IAG) is experiencing growth and change at the same time!  

Thanks to all of you, IAG has grown and it is time to add some new faces and talent to the firm. As such, we've been interviewing candidates over the past month. Whether it be our relationship with our clients or other associates at IAG, it is a very a family-oriented environment. Thus, we are really focusing on adding what we consider "the right" professionals to our firm. As a result, at some point in the near future, we will be announcing who’s joined our family. 

ToanAlong these lines, Toan Nguyen, our Director of Operations, has accepted a position with another company outside of the financial advisory industry. That being said, we are sorry to see him leave since he has been a loyal associate for almost nine years. Toan stated that he struggled making this career change; however, it is a great opportunity, and we are excited for him. We appreciate all his efforts over the years and wish him well. 

One thing that won't change is our goal of providing you the best client experience we can.  Feel free to contact us if you have any questions.

 

Quotes 

"The race is not always to the swift, but to those who keep on running."

                   Author Unknown

"There are many things you can learn from children - like how much patience you have for instance."

                   Fran Lebowitz

 

Tony Moeller, CPA 

The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.  

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