Though there’s no foolproof way to handle the ups and downs of the stock market, maintaining your perspective can help. Market volatility is a normal occurrence, but it can certainly be tough to handle when it’s your money at stake.
All market declines have a few things in common – each of them feels like “the big one”, each is explained by circumstances that people feel cannot change and that will only produce further declines, and most importantly, market declines have all historically run their course and ended, just like the breaking of a storm.
Right now, our main worries are the solvency of the European countries, the U.S. economy and the lack of cohesiveness in Washington. But as I have continued to communicate to my clients through this period of volatility, it’s not all bad news out there, and a little perspective can help you succeed with your long-term goals.
This is not 2008. Although it may feel like it, there are major differences between then and now. U.S. banks are in much better financial shape than they were when the housing market collapsed, the consumer is less leveraged than they were and have been saving at a higher than normal rate, economic growth is positive, though certainly weak, and corporations have a lot of cash on hand.
Companies are strong. Large-cap companies in particular have strong balance sheets, have been increasing their dividends, are initiating more mergers and acquisitions, and are buying back their own stock. They also derive a large part of their earnings from overseas markets where economic growth remains stronger.
Valuations present a good buying opportunity. The valuations on most stocks have become even more compelling after this correction, creating exceptional buying opportunities. As famous investor Warren Buffett says, “Be fearful when others are greedy. Be greedy when others are fearful.”
So what can you do to handle the ups and downs of this market? Some of our age-old financial planning principles still apply, and are more important than ever.
Diversify. Diversifying your investment portfolio is one of the key ways to handle market volatility. Because asset classes often perform differently under different market conditions, spreading your assets across a variety of investments such as stocks, bonds, real estate and cash has the potential to reduce risk. For example, a small portion in alternative investments that don’t correlate to the overall markets can help.
Focus on the forest, not the trees. Keep your eyes on your long-term investing goals and not on the day-to-day returns. Establish your risk tolerance and adhere to it, but don’t stick your head in the sand, either. Consult with your Financial Advisor to periodically review your portfolio and make adjustments where necessary, based on the current environment.
Play defensive and look for opportunities. Right now, one such defensive sector is large, U.S. based, dividend paying companies. Because they have strong balance sheets and are selling at attractive valuations, these companies can offer growth potential when the markets rebound, and some even provide a higher yield than the ten-year Treasury. Dividends also can help cushion the impact of price swings, and have represented roughly one-third of the average monthly total return on the S & P 500 since 1926.
It’s not clear yet what the catalyst will be for a new market advance, but it’s apparent that at these levels there are some attractive opportunities. The right approach during all kinds of market cycles is to be realistic. Have a plan and stick with it, strike a comfortable balance between risk and return, and consult with your Financial Advisor.
Linda Zivney is a Registered Principal of Zivney Financial Group, LLC, An Independent Firm Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Any opinions are those of Linda Zivney and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Dividends are not guaranteed and must be authorized by the company’s board of directors. Diversification and asset allocation does not assure a profit or protect against a loss.