Finance 1. Understand that “stuff” happens Perhaps the best way to deal with volatility is to change the way you think about it – to understand that it’s a normal, natural part of investing in most anything, but particularly stocks (and, to a lesser degree, bonds). That’s not meant to sound trite. Yes, volatility can be difficult to deal with; it’s unsettling at best, and scary at worst. It can disrupt your ability to achieve your financial goals and potentially cause your life plans to go off track – at least for a time. But it happens. As any veteran investor will tell you, the stock market never moves up in a straight line, and long periods of growth are inevitably followed by periods of retreat or stagnation. Understanding and appreciating that it’s typical for “stuff” to happen in the stock market can go a long way to re-framing unsettling events. By managing your emotional reaction to volatility, you’ll be less likely to commit mistakes or make irrational decisions. In the long run, that’s the best kind of financial protection there is. 2. Turn off (or turn down) the noise Part of the problem with volatility is that we hear about it all the time. Sooner or later, the never-ending chorus of negative headlines becomes self-reinforcing. We begin to believe that all economic or financial news is bad, and that bad news is the only news that counts. We discount contrary opinions (see point #3, below) and actively seek out information that re-affirms our pessimistic point of view. Instead of getting caught up in the short-term ups and downs of the market, focus instead on the long term, which is almost universally positive. If you can’t put down your phone, turn off the TV or avoid strolling past a newspaper stand (and let’s be honest, we can’t), try to limit your consumption of news or commentary. Go ahead and read the newspaper, but don’t pore over the stock tables. Be aware of economic events – but don’t obsess over them. 3. Seek contrary opinions Former U.S. president Ronald Reagan used to tell a joke about economists: if the game Trivial Pursuit were designed by economists, it would have 100 questions and 3,000 answers. Funny, and true. Economics, finance and investing are notoriously difficult subjects. And, unlike many other disciplines, there are many arguments in economics and finance for which both sides are equally compelling. This is important to keep in mind during times of volatility: for every compelling reason why the sky is falling, there is likely to be an equally compelling argument that it isn’t. If you’re worried about a given set of economic data, or if you’re concerned about what might happen to a given stock, asset class or geographic market, make sure to seek out different opinions before making up your mind about it. This is a core trait of many of the world’s most successful investors: the ability to seek out (and respect) opinions contrary to their own. So when you read about volatility (or any other investing topic), make sure to be curious and approach it with a critical mind. It’s what the millionaires do. 4. Review allocation/ diversification If you’re a veteran investor, you probably already know about the importance of asset allocation and diversification. While it’s easy to dismiss such advice as the “same old, same old,” it bears repeating: often the best way to protect your portfolio is to avoid putting too many eggs in too few baskets. Over the course of the long-running bull market, it’s possible that your portfolio has deviated somewhat from your baseline allocation to stocks/bonds/ cash. In a similar way, the level of geographic or sector diversification in your portfolio is also likely out of sync, as U.S. stocks have outperformed many other markets of the world. And within your equity allocation, certain sectors (technology, mega-cap stocks and a few others) have done exceptionally well. If you’ve been fortunate enough to hold any of those in your portfolio, youmay very well have too many of your portfolio “eggs” in too few baskets. It’s a good idea to take What should you do about volatility? Now that you know some of the issues behind the current bout of volatility, what should you do about it? Here are 12 suggestions – some tactical, portfolio-level actions; others bigger-picture, psychological and “mindset-oriented” ideas. 32 | www.snowbirds.org
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