Investment Moves for a Volatile Market

Originally published 6/14/2010 at the Financial Planning Association's All Things Financial Planning blog

Robert Schmansky, CFP(r)

With the recent volatility in the markets, everyday investors I meet with are demonstrating polar-opposite positions.

On the one hand, many investors’ first instinct is to flee equities and flock to cash, fearing economic concerns will be reflected in the markets.

And on the flip-side, others are seeking income alternatives to all-time low interest rates. Corporate and high-yield bond funds, as well as dividend paying stock funds are looking attractive to these savers despite their significantly higher risk.

In both groups, feelings are reminiscent of the aftermath of the 2008 market correction. Cash yields were perceived to be low (relatively). Growth assets, also like today, were not seeming to grow.

Yet, many who fled from stocks way back then were surprised by the market recovery in 2009. And those who ditched the safety and protection against deflation in cash and Treasuries found that yesterdays ‘low’ yields were preferable to losing money in higher risk bonds and equities.

In the dichotomous situation we find ourselves, where do we turn?

Here are some suggestions for both the risk-adverse, and adventure-seeker:

Revisit your asset allocation mix. A properly diversified portfolio for the vast majority will include stable, low-yield investments to provide protection against deflation and market risk. If you have a portfolio allocation you’ve deemed appropriate, stick with it, no matter rates or short-term returns yield.

Consider how your fixed-income investments responded to the last stock market downturn. If they declined similarly to stocks, you may be underdiversified for the possibility of a continuing low-rate and deflationary economy.

Stick to your plan. The best time to buy is often when we have the least desire to do so. Review your plan with your advisor. Figure out if shifts in your portfolio are appropriate to stay the course.

Turn off the tube! Most economic news today does not enrich your life or help you better achieve goals. At best, we are slightly more informed about what happened yesterday. At worst, the doomsayers trigger unnecessary anxiety. Even the most esteemed economists do not possess better crystal balls for predicting the market, so don’t let a positive prognosticator throw you off your strategy.


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