When Market Volatility Strikes

by | Jun 1, 2019 | Our 2 Cents

Recently, the news has been flooded with updates in the ongoing trade war between the US and China. The president recently stated that he would increase tariffs from 10% up to 25% on $200 billion in goods imported from China. The market responded in mid-May with some heavy losses as investors had hoped a trade deal would be reached. When events like these occur, it is common to wonder if you need to do anything. Should your investment strategy be made more conservative? Or aggressive? Here are several nuggets of financial wisdom to consider: 

Market volatility is very normal – One important factor that needs to be always considered is that financial markets are made up of people. By our very nature, people can react irrationally to the stresses that make up our lives. The market is no different, only more complex. Financial markets react and price their investments according to the most recent news and information that they have. This is a factor that can cause the up and down spikes in investment values. When new information becomes known, the market can react to understand how that information can affect the prices of investment. People may buy and sell investments based on that information. Do people sometimes over-buy or over-sell an investment? Do people sometimes misunderstand the impact of the news? It’s critical to understand that financial markets are irrational in the short-run and can make knee-jerk decisions. Rule #1 – Financial markets cannot be accurately predicted in the short run. Over the long haul, historically the market has been surprisingly consistent in its levels of risk and return. Keep the long view in mind. 

Why timing the market typically does not work – In order to accurately predict the market, it’s not enough to know that the price of an investment is going to go up or down. You also have to know when it’s going to change. We’ve already established that markets are irrational in the short run, so this level of prediction becomes quite impossible. You might know a stock’s price is too high, and that its price should fall. You then “wisely” sell it hoping to lock in your gains. That seems like a good approach. However, if the price continues going up for the next 3 years before finally falling, you’ve made a very grave mistake in your prediction, and missed out on investment gains. Rule #2 – There are people who study the markets for a living who can’t reasonably predict or time the market. What makes you think you can do it? 

***As your advisors, we don’t even claim to be able to do this.*** 

Why a personalized financial plan is so important – A financial plan’s purpose is actually quite simple. It’s designed to answer the financial questions we all have like: 

  • When can I retire?
  • Am I going to be okay?
  • How much can I spend?
  • What if the market goes down, taxes go up, I have a medical emergency, etc.?

It’s critical to understand that a good financial plan has baked into it allowances for market volatility in order to answer these questions. The plan will also understand what your goals are for your money so that you are not taking undue risk with your savings. Some savings will be meant for longer term purposes; some for shorter. A financial plan can give you reasonable assurances that you’ll be able to meet your financial goals even in the midst of the unpredictable ups and downs of the market. A business needs a business plan. A homebuilder needs drawings and renderings to build the house. Rule #3 – You absolutely should have a financial plan that accounts for market volatility in order to achieve your short-term and long-term goals.

Be careful of the media – On the evening of the 2016 presidential elections, a large number of articles from reputable finance companies and banks were posted predicting a market dip. Not only did the market not dip; it shot up. This reinforces our point that it’s truly impossible to predict the outcome of financial markets in the short term. We must also remember another critical truth: not all media has the noble goal of merely giving their readers true information. Many of these media sources have advertisers; getting more clicks makes more money. What’s the best way to get clicks? Appeal to people’s fears and greed. If you see an article title stating analysts are predicting a 15% market drop in the next year, you might feel compelled to click that link to know why. Should you allow this to dictate far-reaching, personal financial decisions knowing there might be ulterior motives to that media source? This is not to say that all media sources are biased. Rule #4 – Stick to your personalized financial plan for your financial decisions rather than media articles, which may be biased.