Content provided by Scott Kubie, CFA, CLS Chief Strategist
More than any other season, fall brings greater emotional volatility. I’m not talking about the markets (yet). I’m talking about sports. The four most important sports to me are tennis (my son’s high school team), Nebraska football, Nebraska women’s volleyball, and baseball (Minnesota Twins). All have key parts of their seasons in the fall. I don’t watch games where my rooting interest isn’t strong, so every game matters and every loss stings, at least for bit. But the joys of wins are worth it.
Markets are often more volatile in the fall too. The experience of the past few weeks has sent a few of our investors scurrying to cash. If you’re a financial advisor, the pressure is greater because you have the weight of so many clients’ futures resting on your decisions. Before letting the recent volatility push you over the edge, here are a few things I use to help maintain perspective:
- Bearing volatility is what we get paid to do. Putting up with the risk is what generates the opportunity for higher returns. Stocks have earned more than Treasury bills because there are opportunities for the investments to go down, allowing investors to buy low and sell high.
- Three. That is the number of days the S&P 500 has been down more than 10% from its high in 2013. For the returns in recent years, three days in correction territory doesn’t seem like too much to suffer through.
- It’s 2015, not 2008. The excesses that drove the 2008 real estate market have lessened. Economic growth doesn’t point to a recession or hyper-inflation right around the corner.
- It’s 2015, not 2009. The emotional reaction reflected in market prices in 2009 is in the past. Investing risk has two basic sources: business risk and investor risk. Investors contributed a lot of risk to the market in 2009, so the rewards were very high. In recent years, we’ve seen low volatility because businesses have done well and investors have stayed the course. Expect businesses and investors to add more volatility in future years.
- Don’t look at your portfolio values (or your client’s) too often. While I know how the market fared each day, I don’t look at my portfolio more than once per month. The average risk budget of my accounts is around 90, so if the market is down 7%, I expect to be down around 6%. No point in checking on it every hour.
- When you do look, think about your portfolio in terms of percentages rather than dollars. Dollars are emotional, percentages less so. If an 8% decline causes your portfolio to drop $100,000, it means you are still a millionaire. Putting the moves in terms of percentages makes the ride easier.
- Don’t switch from watching your portfolio to watching the news. My experience is investors who watch the news get more nervous in down markets. Constant “breaking news” raises the emotional temperature. I’ve found investors who follow markets or politics closely are more likely to panic.
- If your portfolio doesn’t cause you a little concern, you might be invested too conservatively. Assuming markets go up over the long run, investing too conservatively can cost far more than the losses that come from corrections.
What should you do if you are still nervous? Take a walk, do something fun, or watch a sporting event. If your team wins, you’ll have something to celebrate. If they lose, you’ll have something else to think about.