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Since 2012, financial markets have been remarkably calm by historical standards. Much of this was driven by low interest rates from central banks leading to market indexes steadily moving higher. Now, central banks are increasing interest rates ending the long period of calm conditions and rising stocks. New risks have emerged creating pullbacks and rebounds leaving many investors unnerved. Though there are reasons to remain positive about the market outlook: companies continue to post strong earnings and positive future forecasts, consumer confidence remains high, low employment, and high household wages. At the same time, there are new market risks, which have spurred the recent increase in volatility. Those risks include political uncertainty in the US and Europe, potential trade wars, and rising global interest rates.

What should investors do?

When making investment decisions investors should focus on three items: Investment goals, time horizon and volatility tolerance. It is important for investors to establish goals for each account within their portfolio. Total return is perhaps the most popular reward that investors pursue, but there are many others. Such as income generation, capital preservation, liquidity, tax mitigation, or furthering a social or environmental cause.

Questions to consider:
  • What is your goal for each of your investment accounts?
  • How will market moves impact the probability of success towards that goal?
  • Are you relying too heavily on market performance to meet your goals?

Have specific goals

All assets fluctuate in price over time. Some assets have more predictable fluctuations (e.g. US Treasuries) while others are more volatile (e.g. large capitalization stocks). I have previously blogged about the importance of having clearly established goals. By doing so you can identify a date when the investment needs to be turned into cash to fund the specific goal. Investors often refer to that length of time as “time horizon”. For example, a professional who is just starting her career, may have 20+ years until retirement. However, another professional who is closer to retirement may only have 3-years left to save. In volatile markets, investors with a shorter time horizon should consider shifting to a capital preservation strategy. Due to the shorter time horizon, they are less able to recover short-term losses. Conversly, investors with a longer time horizon can stay the course and take advantage of pullbacks to increase future gains.

Questions to consider:
  • What is your time horizon?
  • If your portfolio under performs, are you willing to extend the time                        before acting on your goal?
  • Would you delay retirement or purchasing a house?
  • Is the goal fixed, such as education?

Understand your volatility tolerance

For all investors, regardless of your goal or time horizon, understanding your volatility tolerance is crucial to making investment decisions. Volatility tolerance is the ability of an investor to withstand temporary losses and not allow market fluctuations to impact your investment decisions. As an investor you must weigh the amount of volatility you are willing to weather in exchange for return or income.

Questions to consider:
  • Would you stay invested if your portfolio dropped 10%
  • Would you stay invested if your portfolio dropped 20%

Consider a hands-off approach

To help ease the pressure of navigating volatile markets, you may want to consider outsourcing your investing through mutual funds, a managed account, or working with a professional. At Pleasant Street Wealth Advisors, we work with our clients to create strategies that help them reach their financial goals. Helping clients to identify and clarify goals, understand volatility tolerance, time horizon and ensuring all portfolios can withstand the peaks and valleys of the market is at the core of our process.

The bottom line

Rather than focusing on the volatility, getting caught up in the chaos of  daily market news or wondering what the market will do tomorrow, it makes more sense to focus on developing and maintaining a sound investment plan. A good plan can help you ride out the peaks and valleys of the market and may help you achieve your financial goals. Investor behavior is the most important determinate of success over the long run.

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