“In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.” Theodore Roosevelt
Market volatility has returned and in a big way. Aside from the longest bull market on record, which, in and of itself may be a reason for caution, there are major headwinds to consider relative to international politics and trade policy. In addition, a strong US Dollar, rising interest rates, increasing concerns of consumer debt, uncertainty regarding the effects of tax policy, spending, the US deficit, and more, has brought volatility to levels that we haven’t seen since February 2018. This is NOT necessarily the beginning of the end since we are still, arguably, the strongest economy in the world. With an accommodative White House, low inflation and interest rate environment, strong corporate sales and earnings, and many more positive factors, any downturn in the market may be buying opportunities for those with a long-term perspective. Statistically, over longer holding periods, stocks show low chances of losses and have been one of the few asset class to beat the erosive effects of inflation on an after-tax basis.
Conventional wisdom would advocate patience, but being patient doesn’t mean to DO nothing. Honestly, with the strength of the market until recently in a highly secular trend benefiting growth stocks over value and highly dominant sectors such as technology, the wise advisor and investor would have been aggressively monitoring the risk of their portfolio, taking profits and reallocating assets to maintain the asset allocation and diversification that they had originally planned for.
This is easily accomplished with the majority of retirement plans by automating rebalancing over a certain frequency. I personally choose a quarterly rebalancing schedule.This allows my investment allocation to return to my model quarterly. Also, within retirement funds there are no taxes for buying or selling in order to reallocate, taxes are imposed only on distributions. Outside of retirement plans, the prudent investor and advisor considers tax implications and may choose to take losses to use as an offset to gains when rebalancing the portfolio, have an active approach amidst the volatility.
Certainly as I quote from Theodore Roosevelt, “the worst thing you can do is nothing.” With an increase in volatility there are two aspects to consider, Opportunity and Risk. Determine what your asset allocation model should look like to take into account your financial objectives tempered by your tolerance for risk. Invest for the long-term but review your portfolio often, (no less than annually), look for opportunity and also consider if you have strayed off your path of diversification due to market influences. Last and most importantly, consider the fact that not all tools are the same for market participation and diversification. The Universe of investment choices, products, tools, strategies and concepts is highly diverse and extensive today. Not having expert product knowledge or expert advice will have a huge impact on your ability to succeed as an investor as well as your ability to mitigate risk and manage for “defining specific outcomes” for the well-being of you and your loved ones.
Remember doing nothing may be the worst decision you can make!
Have a question about this topic? Contact us today.
Our team at RZ Wealth is committed to helping clients prioritize and understand their needs to best guide them with insightful wealth management including financial, education, retirement and estate planning.