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Uncertainty Necessitates Financial Discipline

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Uncertainty Necessitates Financial Discipline

Written by: Thomas Kostigen

Uncertainty in elections, world trade, domestic economic policy, and interest rate adjustments plays a big part in how most of us perceive risk. In fact, a fear and greed index has been devised to show what drives the stock markets. And in just the past year, that index has hit its near record high and its near record low. The flip flop is understandable: the trade war with China has excited fears that the US economy would slow, if not the global economy; the presidential election is producing alarm that more socialist policies will be embraced by certain candidates that that will send personal and corporate taxes higher. Irrational tweets emanating from a chaotic White House administration don’t exactly help to give investors a feeling of stability, either. A stock market tumble is merely a tweet away from a recklessly tweeted salvo. At the same time, lower interest rates and positive employment numbers have created optimism about corporate earnings and overall business strength.

The consequences of such externalities actually show up as mere blips in the capital markets over time. Most people at first struggle to digest news and then reallocate funds accordingly—and soberingly. Data show everything from wars, political parties in and out of power, and many other worry points have not prevented the stock market from rising over time.

Professional investors have frameworks and investment policies that they follow (see last week’s column on investment policy statements) to enforce portfolio management discipline. But we average, individual investors, often flap with the winds of change in the investment markets, proverbially allowing the tail to wag the dog with our investments.

At the Schwab Impact 2019 conference in San Diego, which was held November 4-7, uncertainly was a big topic of discussion. Hundreds of professional investors gathered there to better understand the major issues facing the capital market so they can implement sound policies for their investment management programs well into the future. Politics, technology, data privacy, evolving global trade, and fractured demographic investing behavior were all top of mind. Rather than negatives, discussions revolved around how to profit off these market forces.

We individual investors don’t often get the benefit of positive enforcement, of historic reminders that markets tend to go up, despite downturns. Part of the rationale for hiring a financial adviser is that he or she can remain more objective about money.

For those of us who invest or trade for our own accounts, it’s good to be reminded of long-term optimism. Indeed, CNBC published a report last May explaining why volatility shouldn’t scare you — even close to retirement.

“Too much volatility, and you’re likely to panic and make disastrous decisions during the market’s roughest environments. Not enough volatility and you’re probably not taking enough risk to earn the returns you’ll need for later. It’s counterintuitive to think about volatility as your portfolio’s best friend, but once you switch your mindset over to doing so, you’ll become a much stronger and better equipped investor,” the report noted.

That’s important advice in this financial environment, where stock and bond investors are facing the highest degrees of market uncertainty in several years.

Lesson: don’t be thrown off course. Financial advisers have multiple investment routes to achieve successful portfolio results depending on various scenarios. You should, too. Worry points are points along the way to financial objectives. They can also be seen as opportunities.

Thomas Kostigen is a contributing writer to www.myperfectfinancialadvisor.com, the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.

Related: Should You Fully Delegate to Your Advisor?

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