Stock markets are down this year between 10% and 15% across the globe. From their recent highs set in 2015, the drop has been an even larger 15% to 30%. Now is a good time to talk battle plans for handling this type of investment volatility.
While investment battle plans are best established prior to declines, it’s never too late and today’s lessons will no doubt help you tomorrow.
Your first line of defense is to do an investment risk assessment.
A proper risk assessment is a function of your age, income, assets, debts and your lifestyle desires. Together, these factors define your financial capacity for taking risk. It’s the brains, but not the heart of the matter.
A clinical exercise in financial accounting just isn’t sufficient to capture the power of your emotions. While investment advisers tend to denigrate investors’ emotional decisions, let me provide you with a more-nuanced view.
Like it or not, your emotional tolerance for risk will always be a part of you. Discounting who you are is generally a futile fight. Given this reality, your focus should be on properly aligning your portfolio’s high-level structure with your tolerance for taking risk. If you don’t know your portfolio’s asset allocation, review it now.
Your next line of defense is to actually know what you’re invested in.
If you own mutual funds, like most people, you should work to understand the investments sitting inside those funds. Remember, a mutual fund is just a box with wrapping paper on it. What’s inside is what matters most. If you don’t know the type of funds you own, find out.
Your third line of defense is to be diversified.
Diversification is often cited by investment advisers. Sure, it’s good, classic advice; don’t put all your eggs in one basket. But, calling it good after simply noting a long list of holdings on your account statements may open you up to some hidden risks.
Ask yourself if your portfolio is hanging on a common thread. For example, in your search for income in a yield-starved world, do you own too many real estate funds, lower-quality bonds or even safe-looking bond funds that rely on leverage?
Upon deeper analysis, you may have exposed your portfolio unknowingly and are actually undiversified. After all, diversification is not about how many investments you own. Rather, it’s about the commonalities and differences between them. If you are unaware of the factors that affect your portfolio, I’d suggest you start doing your homework
Jason P. Tank, CFA of Front Street Wealth Management will hold a free educational workshop on “Battle Plan for Investment Volatility” on Feb 24th at 3:30 pm in the Blue Room at the Traverse Area Chamber of Commerce. Call (231) 714-6407 with questions, visit frontstreet.com/workshop to learn more.
