Denver Business Journal: Dana Gleason Nightingale, CFA, outlines simple strategies to help the average investor navigate volatile markets

December 7, 2018

by Dana Gleason Nightingale, CFA

If you are an investor, you are probably well aware that the equity markets have been on a bit of a wild ride lately. October and November saw volatility return, and several traders and analysts believe that these market swings will likely continue to test investors’ confidence as we head into the New Year.

This roller coaster-like trend stands in stark contrast to 2017 when volatility was extremely low and gains were consistent throughout the year. According to the Wall Street Journal Market Data Group, the average observed one-month volatility in the S&P 500 in 2017 was lower than any other year since 1970.

Fast forward to the end of 2018, and the sharp climbs and quick drops can make a stock market chart look a lot like the peaks along the Continental Divide. If you are investing in volatile markets and seeing sudden up and down swings, you may experience the same queasy feeling in your stomach or light-headedness that comes with conquering a Fourteener. Excitement builds as the value of your assets increase, but anxiety and fear can set in when they suddenly drop.

There are a few basic things you can do during volatile market periods to put yourself in a position to achieve your long-term financial goals.

Plan to stay invested and avoid extreme changes to your portfolio

Trying to “time” the market can be extremely difficult and doing so can result in emotional decision-making. Investors tempt fate when they sell stocks in anticipation of a further market decline, not realizing that a recovery is close in sight. In fact, according to research published by J.P. Morgan Asset Management, an investor who missed the 30 best performing days during a 10-year investment period earned 8% less on average per year than an investor who stayed invested.

Instead, embrace a long-term approach that can actually help you minimize your risk during volatile swings. Wise investors will tell you that a pillar of wealth accumulation is maintaining a long-term perspective and rarely making extreme changes to your portfolio.

Turn off the TV and don’t check in every day

As hard as it may be, ignoring the daily news cycle and up-to-the-minute financial coverage during times of volatility can be extremely helpful in maintaining an even keel investment mindset. The same goes for your online investment website or portal – try not to check this every single day if it causes you anxiety.

According to behavioral economist Richard Thaler, a loss hurts roughly twice as much as an equivalent gain gives pleasure; this helps explain why many investors are hyper-focused on the downside and sometimes react irrationally if they fear they will lose more money. Tuning out the noise helps minimize your emotional response to short-term swings in the market.

Maintain a diversified approach and consider rebalancing your asset allocation

Some years foreign markets or small cap stocks outperform, while other years domestic markets or large cap stocks have better returns. Since returns vary significantly across asset classes, it is best to own a diversified portfolio and not overweight any one strategy. Periodic rebalancing also helps maximize your long-term returns by locking in gains from areas of the market that have outperformed and putting money to work where there may be greater value.

Talk to an advisor

Volatility, selloffs, and down markets can be very stressful for individual investors. It can be extremely helpful to use this time as an opportunity to speak with an experienced advisor who can put all of this into perspective and talk you through your nerves, fears, and concerns.

An advisor can help you establish, refine, and stick to a plan. One can also help you stay focused on your long-term aspirations while acting as a “check” on your emotions. After all, later in life and in retirement, mistakes derived from emotion-led decisions can be very costly.

Dana Gleason Nightingale, CFA, is a Vice President, Investments and Client Advisory at Obermeyer Wood Investment Counsel.

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