Market Volatility: The Perfect Answer For "It's Time Do to Something"
True story: I had a friend who was such an abysmal investor he actually started investing against his own judgment. He’d plow through masses of data, read every piece of expert investment advice he could get his hands on, and make his picks. If his research and intuition told him to sell energy stocks, he’d invest a bundle in the sector. When he thought he was looking at a stock that was a “sure thing,” he’d sell. It was a bit crazy, but it paid off. Why? Because the one thing he knew for certain is that what he had been doing before wasn’t working, so he did the exact opposite, and his portfolio surged.
Just do something different
At the moment, it seems more than a few people are wondering if the Fed should think about using a similar tactic. Interest rates have been at historic lows ever since 2008 when rates plummeted to zero in an effort to salvage the tanking economy. And while a lot has changed in the US economy, the Fed has stuck by its old policy that rates shouldn’t be raised until core inflation hits the magical number of 2%.
But after a single rate hike in late 2015, Janet Yellen et al decided to sit tight. Again. This time the reason was Brexit, but it seems like there’s always something threatening the US economy. Brexit. China. War. And with a constant barrage of global events, it seems unlikely the US will exceed the 2% core inflation point any time soon—much less remain consistently above it.
Don’t get me wrong. I don’t presume to have all the answers. I’ve heard smart people on both sides of the fence argue for and against a rate hike, and both camps have very valid points. There’s no easy answer. So maybe the Fed should, like my friend, throw caution to the wind and just do something different. Just for the heck of it. Just maybe.
Then again, maybe they should look before they leap.
Setting Guideposts Creates Confidence for Advisors and their Clients
Here’s the thing: in today’s volatile environment, it’s easy to get caught up in the frenzy. There’s too much news. Too much information. Too much input to make smart, sensible decisions. For advisors, it begs the question: how do you manage your portfolios in the midst of unprecedented volatility? How do you manage the unmanageable?
The best-selling trading book of all time, Trading for a Living by Alexander Elder is a great place to start. (The updated version, The New Trading for a Living, was released in 2014.) Of course, there are many methods out there, but all of them are designed to help advisors and investors develop a disciplined approach to investing that removes the psychological and mechanical barriers to success.
As we all know, one of the biggest of those barriers is reacting to the market. You’ve seen it with clients: as soon as the market dips, the phones start ringing with clients wanting to jump ship—right at the worst time to sell. When the market peaks, everyone wants to jump on board—right at the worst time to buy.
It’s an easy cycle to spot when someone else is making the blunder. But unless you’re following specific guidelines and have created your own guideposts that drive not only buy/sell decisions, but the myriad other decisions you have to make on a daily basis, how can you be certain you’re not blundering yourself? Trading for a Living is a great read for anyone who wants to develop a calm, disciplined approach to the markets because it focuses on managing risk and managing your own responses to market volatility and other events, and it provides clear pathways for both.
Perhaps the most valuable outcome of having unshakeable guideposts in place is not confidence in your own decisions (which is wonderful in itself!), but the confidence of your clients.
The next time a client comes to you saying that “it’s time to do something,” you can remind them you already did do something. You jointly agreed to a strategy and guideposts that you’ll use to grow their wealth over the long run. You balanced their tolerance for risk and reward. And now they need to trust those decisions will pay off.
Even if Janet Yellen trusted my advice about the best next step for interest rates, I don’t know what I’d recommend. Perhaps trying something new is the right move. Perhaps it would be an economic disaster. What I do know is that creating and following concrete guideposts is the best possible way to manage uncertainty.
Don’t Be Tempted to Persuade Your Clients
Recently, I've been seeing a lot of articles about Advisors persuading clients to move from active management to passive management. Persuading clients to follow the way you manage investments is a big mistake. Do this instead.
Click on image above to watch the video.
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