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6 Strategies for Weathering Market Volatility

10 Minute Read

If you are an individual investor — particularly if you are a retiree working with a shorter investment time horizon — volatility in the securities markets can follow you around like a black cloud.

When the value of your life savings and wealth is fluctuating dramatically from one day to the next, it’s unnerving. Indeed, with today’s 24/7 media coverage of the financial markets, and the ability to follow the ups and downs of the markets in real time on any number of personal devices, minute-by-minute market volatility can make the investing experience downright exhausting.

Here are some best practices for investors — recommended by Keliikai Castillo, a senior financial advisor at UnionBanc Investment Services — aimed at reducing the portfolio impact (and anxiety) often associated with market volatility:

1. Participate in a planning exercise with a professional financial advisor.

Financial planning allows you to identify your investment goals and the return targets you need to hit to meet those goals, as well as understand your risk tolerance. It will help drive your decisions about the sectors and specific securities you might want to invest in.

Having a financial plan gives you a touchstone you can revisit and use in decision making, particularly when you are faced with heightened volatility.

2. Revisit your plan often, especially during volatile market cycles.

Major volatility events, like the start of the pandemic or the war in Ukraine, can cause alarm for investors. When those events happen, it’s a good time to meet with your financial advisor and revisit your financial plan, Castillo says.

“In such times, investors have lots of questions: Do you consider a more defensive investment strategy? Should you take some risk off the table? Or should you avoid any reallocation because you need a certain rate of return to meet your goals?” Castillo says. “Revisiting the plan with your financial advisor can provide answers, and may help prevent you from responding in a strictly emotional way to market swings.”

Routine portfolio reviews with a financial advisor should educate you on the level of risk associated with your overall asset allocation, asset class weightings, sector exposures, and security selections within your brokerage account, Castillo says.

3. Avoid concentrating too much into a single sector.

Prior to the financial crisis of 2007-09, Castillo recalls that investors had become complacent about the strong returns and large dividends they were seeing from bank stocks that were historically considered large and stable, and many allowed their portfolios to become too heavily concentrated in that sector. “Retirees became very reliant on those dividends for their cash flow needs, and when the crisis hit, those stocks significantly lost share value and their dividends were slashed. It had a devastating impact,” he says.

In early 2022, many investors who had become enamored with the strong performance of technology stocks felt a similar pain when that sector saw big declines. Castillo says today’s investors need to heed these lessons and use portfolio reviews with their advisor to eliminate heavy portfolio concentrations.

4. Practice prudent cash management.

The experience of the financial crisis and its impact on bank stock dividends highlights how market volatility can affect investors’ cash flow. That being the case, Castillo says it’s important for investors to have a source of liquid funds that can provide six to 12 months of living expenses. This could be in the form of a savings or money market account, some other liquid investment, or a home equity or securities-based line of credit that provides easy access to cash. “Having a source of liquid funds allows you to keep your long-term investment dollars in the market working for you,” he says.

5. View volatility as an opportunity.

Market volatility is typically seen as a bad thing, an investor’s nemesis. But Castillo says it’s important that investors also view volatility as an opportunity.

He advises his clients to practice dollar-cost averaging, a strategy that helps investors take advantage of the fact that markets move up and down but historically end higher. Dollar-cost averaging is the practice of systematically investing equal amounts, spaced out over regular intervals, regardless of price. It reduces the risk associated with investing a large lump sum at one time and then having the market experience a big decline, while at the same time allowing investors to take advantage of regular upward market movements.

For clients favoring a more active approach to investing, dollar-cost averaging could mean waiting to invest a portion of idle funds until the market is down, and stocks are trading at lower prices.

6. Monitor the market outlook.

Anticipating periods of increased volatility can give investors added confidence. One way to do that is to monitor the Cboe Volatility Index.  The VIX Index, as it is known, acts as a barometer of market uncertainty, providing a measure of constant, 30-day expected volatility of the broad U.S. stock market. When the VIX Index is up, the near-term likelihood of price swings in the equities market is greater.

Investors need to understand there will always be market volatility. Like death and taxes, it’s inevitable. But if you adopt these six best practices, volatility can prove to be more of a blessing than a curse.


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