In Volatile Markets, Focus on What You CAN Control

If the recent increase in market volatility and drama in our political landscape have you feeling more cautious about investing in the stock market, you’re not alone. In a recent survey of more than 850 Schwab clients, 52% said they’re feeling bearish, compared with just 41% a year ago.

A Better Way to Tell a Correction from a Bear Market?

While every investor is different, periods of volatility can be a wake-up call to make sure your portfolio is positioned correctly, based on your goals and risk tolerance. Navigating through rocky markets can be tough, but focusing on things you can control can help you stay the course.

1. Take the long view

In times of extreme market volatility, each fluctuation can be unnerving. But emotional reactions to short-term market conditions can put you at risk for further financial loss. It’s important to remember the ups and downs in the market are part of the investing process, and even bear markets historically have been relatively short. According to the Schwab Center for Financial Research, the longest bear market since the late 1960s was a little more than two years, and that was followed by a nearly five-year bull run.

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2. Determine your risk profile

Investing is inherently uncertain, and it’s important to be honest about how much risk you’re willing to take. Periods of increased market volatility can be particularly enlightening to help you understand your true appetite for risk. Determining your risk tolerance informs how you should diversify your investment portfolio among stocks, bonds and cash equivalents — higher potential rewards generally come from taking higher risks.

To better understand your risk tolerance, start with some simple questions:

Do you need your portfolio to generate income now or in the near future?
Can you tolerate fluctuations in the value of your investments, financially and emotionally?

A conversation with a financial professional can also be helpful when you’re trying to understand your risk tolerance and build a portfolio that you can stick with through the ups and downs of the market. In fact, about one in five Schwab clients said they sought investing advice last quarter, according to the survey, and nearly 80% said they feel more confident in reaching their financial goals with at least periodic advice from an adviser.

Active vs. Passive: The Case for Both and a Place for Both

3. Diversify and rebalance your portfolio

Having money spread across different asset classes (or types of investments) is important, because each can respond to the market differently. It’s not always the case, but when one is up, another can be down. Deciding on the right mix can help cushion the blow during volatile markets.

Once you determine your target allocation, it’s important to periodically rebalance to maintain that mix. In fact, when we asked Schwab clients what moves they made last quarter amid all the volatility, the most common action was rebalancing.

If you don’t already have one, create a financial plan — it can help remove emotion from investing and keep your focus on the progress toward your financial goals instead of your portfolio performance against the market. And once you have a plan, don’t forget to revisit it periodically to make sure it’s still aligned with your goals, risk tolerance and overall circumstances. According to Schwab’s client survey, 35% say they plan to review their financial plan this quarter.

Warning: Your Investment Return May Be MUCH Lower Than You Thought

About the survey: Information based on an online Schwab survey of 861 retail clients with at least $2,000 in statement equity, conducted Dec. 3 -17, 2018.

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Diversification and asset allocation strategies do not ensure a profit and cannot protect against losses in a declining market.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Joe Vietri has been with Charles Schwab for more than 25 years. In his current role, he leads Schwab's branch network, managing more than 2,000 employees in more than 300 branches throughout the country.