We are all aware of the volatility in the markets. From July 22 to August 11, 2011, the S&P 500 was down as much as 18% intraday and closed down almost 13%, in that time period. The market news has focused on U.S. government debt and the unfolding financial crisis in Europe. In such newsworthy times, it’s easy to get caught up in the proliferation of news stories and even lose sight of why you’re investing in the first place. However, as I often tell my clients, investing is one area where it’s critical to step back from your emotions, educate yourself about what is going on, and develop a solid game plan.
The volatility we saw in mid 2011 had, to some extent, reflected the ongoing Congressional debates about the U.S. debt policy and the historic S&P’s downgrade of U.S. sovereign debt. However, much of the market’s volatility is tied to Europe. The Eurozone countries are undergoing the same level of financial turmoil that the U.S. experienced in 2008, so there is understandably a significant amount of uncertainty related to the current and future health of Europe’s economies.
This type of economic upheaval is not common (though it certainly may seem that way right now!), but as I tell my clients, it is absolutely critical to think about these types of unlikely but potentially disastrous events far before they become a reality. In fact, just last month I published an article about the importance of planning for these types of black swan events.
Once volatility has become a reality, it is critical to gain an understanding of the underlying causes of the situation and to develop a smart game plan to manage it. Generally, I recommend that clients prepare for the unknown by having their assets in two pots. The first and larger pot should be for long term wealth and should be well diversified across asset classes – including alternative investments – and be actively managed. Once again, these strategies have proven themselves in market downturns. Even individual investors can reap the benefits of active management and alternative investments, which I talk more about in my article Institutional Investing for the Individual Investor.
The second account could be considered a trading portfolio, which should be used to take advantage of the opportunities presented by volatility and changing market environments. Right now, I’m recommending that my clients’ trading portfolios include top quality, dividend-paying stocks. With uncertainty about government debt and a volatile market, high quality companies provide an opportunity to buy at a relative bargain, accumulate dividend payments, and take advantage of the potential for long term growth in stock prices. At this point, I believe there are several equities which are relatively undervalued and will provide my clients’ trading accounts with dividend income while the market stays flat or drops.
Of course, not every portfolio strategy is right for every individual, so it is important that your strategy is tailored to your specific needs and risk thresholds. Right now, if you are panicked and avoiding the news or your account statements, you need to take action by reaching out to your advisor for information and a plan. Active management is critical, especially when the market environment is changing. Think about your old 401(k) or IRA accounts. Have you been avoiding rolling over your 401(k) or reviewing the investments in your IRA? Now is the time to take those steps and ensure that you are well diversified and able to respond to a changing market environment.
Still unsure what to do? Reach out to your advisor and ask for his or her analysis of the markets and a game plan for your portfolio. Taking charge of your accounts will not only help you ride out a volatile market, it will go a long way towards helping you feel more confident and empowered when it comes to your money.
For information about managing your IRA or a 401(k) rollover, download my free eBook, “10 Tips You Need to Know About Your IRA Rollover.” This short book is packed with critical information that will help you make the right decisions about your retirement savings.
Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will be successful. Investing involves risk and you may incur a profit or a loss. Investing involves risk and you may incur a profit or a loss. Please carefully consider investment objectives, risks, charges, and expenses before investing.
Written by Bradford Pine
Bradford Pine Wealth Group – New York City Financial Advisors
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