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8 Questions in Assessing Your Exposure to Volatility in 2019

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At this time of year, fund managers, investment analysts and other experts issue outlooks for the coming year and currently many of them focus on their outlooks for volatility. Rather than set up yet another outlook, I am going to suggest questions for assessing your exposure to volatility within your investment portfolio in the coming year. If you handle all of your own investing, try considering some of these questions. If you work with an accredited financial advisor, consider discussing one or more of them with the advisor.

Investing always involves difficult decisions but 2019 looks like it will have one of the most difficult lists of investing decisions in recent years.

Many causes of volatility during latter part of this year will carry over into 2019.

FAANG STOCKS

The FAANG stocks as a group have become a dominant stock market force.

What is your exposure to these stocks?

A major cause of the recent volatility was the drop – both in share price and in some ways in general favor – of the FAANG stocks: Facebook, Apple, Amazon, Netflix and Google (Alphabet). With the exception of Amazon, each of these stocks has some negatives overhanging them. Facebook and Google face the possibility of increased taxes and regulation. Apple has its well-known drop in IPhone sales. Some analysts question Netflix’s spending.

If you went into any of the FAANG stocks and you are still in positive territory, consider selling all or part of your holding and putting the proceeds into less risky equities. I am not suggesting that you liquidate your entire holding in these stocks but you may have some profits that can be deployed elsewhere.  If you hold FAANG stocks and you are in negative territory, assess whether can you leave them alone while they recover their prices. That may take some time, depending on your own entry point.

FAD STOCKS

Fads can be fun in entertainment, dining or clothes and in those cases do not do any permanent damage. However, do you have the stomach for the wild ride of fad stocks? The obvious example that comes to mind is cannabis stocks. It will be awhile before the winners and losers are sorted out. Can you wait for that or are you more comfortable in leaving them alone?

GEOPOLITICAL INFLUENCES

There are so many geopolitical crises unfolding that it would take several editions to treat them all. How exposed are you to the current crises, or even the next one?

Although it can be argued that a portfolio that has absolutely no exposure to sudden geopolitical influences would have to be exceptionally conservative, check for exposure to foreseeable and unforeseeable forces. Last week, shares in Canada Goose, an otherwise solid company, and listed in both the United States and Canada, dropped by $4.95 in one day during Chinese protests and calls for a boycott after Canadian authorities arrested Huawei executive Meng Wenzhou. (To be fair, the market was turning down on that day anyway.) That is not to say that one should liquidate shares of Canada Goose but one of the underpinnings of its share price was its plans for the China market.

BUZZ WORDS

Buzz words are dangerous and as those who read my material regularly know, I feel strongly that the two most abused words in the entire investing lexicon are ‘buying opportunity’. Can you tell the difference between a genuine buying opportunity resulting from a pullback in share price and a clunker? An otherwise solid equity in an otherwise solid company that has pulled back could qualify as a genuine ‘buying opportunity’. An equity that has dropped dramatically into the basement and has no immediate chance of recovery is just that: an equity that has dropped dramatically and has no chance of recovery. Are you confident that you can tell the difference?

RISK TOLERANCE

An individual’s risk tolerance is one of his or her most important investment considerations. Has it become necessary to re-visit your risk tolerance or are you comfortable with it? During the 2008 financial crisis, many investors who felt they had a high risk tolerance when the markets were buoyant found that their real tolerance was lower than they had believed. If the recent volatility has made you wonder, consider discussing this with your accredited financial advisor. In that general connection, check your portfolio for risky equities. Does the portfolio need some de-risking? If so, how much?

AVAILABLE CASH BALANCE

Do you have a large enough cash balance to cover any conceivable emergency? Even though you may be uncomfortable at not being fully invested, a sufficiently large cash balance will mean that you do not have to take a loss during an emergency by liquidating an investment that has fallen in value.

Related: The Financial Advisor as Emotional Guide

STRESS TEST

Can you take the stress of the volatility that appears most likely in 2019? Ask yourself whether you could sleep at night if your portfolio plunged by 10-20% within a short period of time. If your inner answer is ‘No’ consult your accredited advisor about whether some re-structuring has become appropriate.

Consider that sharp plunges and slower recoveries will occur a number of times in 2019.

CYCLICALS

Cyclical stocks are those dependent on a continuing strong economy. The ups and downs of the economy will often result in ups and downs in the share prices of these stocks. Cyclicals include durable goods companies such as auto manufacturers (which are already under other pressures) such as Ford Motor Co., and companies selling construction equipment such as Caterpillar Inc. This category also includes non-durables and discretionary services such as entertainment companies including Walt Disney Co., airlines and the hospitality industries.

By comparison, consumer staples are companies whose products consumers can reasonably be expected to purchase even when times turn tough. These include Johnson & Johnson and Proctor and Gamble.

Discuss with your advisor whether it would it be appropriate to shift some of your money from cyclicals to consumer staples

Next year will be a roller coaster ride on the markets. Consider how much of the ride you can live with.

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