What Should You Do About Market Volatility? – Nothing!

As you are probably aware, we’ve had an “interesting” week in the markets.  Investors are understandably anxious given the recent volatility.  A few of the headlines you may have seen include:

  • The Dow’s more than 1,000-point drop this week was the largest weekly drop since the week ended Oct. 10, 2008.
  • The S&P 500 declined 3.2%, taking its losses from a May high to 7.7%
  • The Dow is down 10.3% from its May peak.

Let me start by sharing two simple facts about this past week:

  • The Dow’s 1000+ point drop represented a 6% drop in the market.
  • Our average client portfolio: 60% equity / 40% bond portfolio dropped only 3.1%.

Several converging factors are weighing heavily on markets.  It appears the Federal Reserve is finally ready to slowly raise interest rates. This has caused the markets to become more volatile as it is unclear what affect, if any, this will have on the US and world economy.  The bond market faced a harsh spring but has since rebounded in the face of the recent stock market decline (somewhat of a counterintuitive move if you consider the prospect of rising rates).

Concurrently, Greece and China have caused more fear and uncertainty.  It appears Greece has moved on, at least temporarily, as it has received a new bailout package.  China, on the other hand, has been intervening in their currency market which has made investors nervous.
Not to be forgotten, the prospect of rising rates in the US has caused the dollar to appreciate strongly over the last year.  This has hurt commodities and countries (emerging markets) that have commodity heavy industries.

Does this mean that we are in for a continued decline?  While there is no way to tell, history shows us that there hasn’t been a significant market correction since the summer of 2011.  Historically, the stock market corrects itself by 5-10% once or twice annually, and 1/3 of the time the stock market is down in a calendar year.  Since 2011, we have gone more than 3 years since a decline.  It shouldn’t be expected, and certainly isn’t guaranteed, but if a 10% or 15% decline were to happen it would not be considered abnormal.

What should a worried investor do?   Frankly speaking: Nothing!   There is no way to predict if this will be a small bump in the road or something larger.  However, what we do know is that trying to time the market is a fool’s game and not worth the time or effort.  The best course of action is to maintain a diversified portfolio that is regularly rebalanced – something we consistently do for our clients.

A properly rebalanced and diversified portfolio, geared toward your age specific goals and risk tolerance, is the best way to weather a market storm.

Here are a few articles that will help to put things into perspective: