Content Provided by Michael Hadden – Investment Research Analyst
In this season of giving, I like to reflect on what I am thankful for. And as an investor, I can think of a few things I am extremely thankful for. While they may not appear to be good candidates for gratitude at first glance, these market whims and principles can benefit everyone.
- Return of market volatility
- Market corrections
- Risk Budgeting
Higher Market Volatility
As Shana Sissel wrote in a recent Weekly 3, market volatility is returning to more normal levels after a period of unusual calm. Many people associate volatility with downturns, but as active managers, we should welcome volatility. Not only can it lead to opportunities for outperformance, but it also presents opportunities to harvest losses in taxable accounts.
I am also thankful for market corrections. This one may make no sense at all. Who could possibly enjoy market downturns and losing money? Well, the truth is that you only lose if you sell out of the market. If you are patient and hold on to your assets, you haven’t lost anything. These are paper losses, and we know that markets historically rise and generate gains over the long term. In fact, corrections allow us to buy attractive securities that are on sale.
Part of the reason that I am thankful for market corrections and volatility is that I have a long time horizon ahead of me to invest. This may seem to be an unfair advantage to some readers as I am just getting started in my career, but the reality is that people generally have longer investment horizons than they realize. Even people who are at or nearing retirement may very well have to fund 20+ years of life. Conventional thinking is to move to less risky assets as you near retirement. This is prudent, but investors often have more time for their investments to recover than they realize.
The overarching principle that allows me to be thankful for all of these things is Risk Budgeting. With CLS’s Risk Budgeting methodology, I can feel assured that I am taking on appropriate levels of risk, and I can be confident that any market environment can be managed to reach my financial goals.
I hope everyone has a great holiday season and can reflect on all that they have to be thankful for. Maybe some of these market features will make that list.