As we weather a bumpy start to the new year, both with the financial markets, and the actual weather, there are 3 important things to keep in mind.
The first is that volatility is a normal part of the market.
In spite of January’s roller coaster ride, the economy is stable, gas prices are low, and employment is up; all of the important indicators are unchanged. If you were comfortable with your portfolio at the end of December, there’s no concrete reason not to like it now. Don’t panic: volatility is not the same as risk. Don’t make rash decisions without expert advice, and remember that this too shall pass.
The second is understanding risk tolerance and risk premiums.
Risk is the possibility that an investment will lose all its value because a company – or the investments a fund holds – are in trouble. Risk Tolerance is how much risk you are comfortable with. Risk Premium is the extra potential reward you get for investing in riskier instruments, such as equities, rather than lower-risk instruments such as bonds and cash.
If you believe that the stock market is efficient over the long-term, then you accept a certain level of risk in order to earn that premium. That probably won’t prevent you from feeling anxious when the market is turbulent. It simply means that you accept volatility as part of the risk/reward equation. If the market is keeping you up at night, your portfolio is probably carrying too much risk and you may want to better align it with your risk tolerance.
The third is to make sure you are getting trust-worthy advice.
When the going gets tough, “experts” often get going. It’s easy to feel anxious when the airwaves and internet are filled with talking heads predicting doom and gloom or, worse, surefire bets.
A good financial advisor does not suggest trying to time the market or reacting based on fear or anxiety. A good financial plan is one that can weather volatility, matches your risk tolerance, has a risk-mitigation crisis plan already built in, and is based on a long term strategy, not a hasty reaction to short-term market ups and downs.
If you’re in the path of the storm, stay safe and drive carefully!
And as we all weather the current market “storms,” remember that with a good financial plan in place, you’ll feel comfortable about your strategy through calm weather and a little turbulence too.
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