Navigating a volatile stock market
In June 2017, the Lodi NewsSentinel published a column I wrote entitled “Don’t Be Fooled by Low Volatility.”
At the time, stock market volatility as measured by the Volatility Index, or VIX as it is commonly called, was near its all-time low. In that article, I cautioned my readers “With peaceful easy feelings washing over the stock market, you may be tempted to plow more and more money into stocks. Giving into this temptation creates the possibility of larger stock market losses than you may want to take or able to afford to take.” That was then. This is now, and investors are not awash with peaceful easy feelings. A few weeks ago, the VIX briefly shot upward about fivefold from where it had been in June. Everyone loves volatility when prices move higher. Unfortunately, the volatile movement was on the downside and the Dow Jones Industrial Average fell by over 1,000 points. The early gains of January were erased. So, what is an investor to do? Should one sell and risk missing out on further stock market gains? If you do sell, where should you invest the proceeds? Is there a strategy that allows you to stay invested while protecting the profits you have made over the past few years?
Let me start by reminding everyone there has never been a time in history when the United States stock market has not recovered from a fall. Now, I am referring to broader market indexes such as the Dow Jones Industrial Average or the Standard & Poor’s 500 rather than individual stocks. Individual stocks might not have recovered, but the broad market averages of the United States, without fail, have always recovered, one hundred percent of the time. Pick any occurrence in history, from the crash of 1929 to Black Monday of 1987 to the bursting of the dot-com bubble in the early 2000s to the lows of the Great Recession, the stock market has always recovered and always gone on to reach new heights.
With that said, history does not guarantee future results. Therefore, the markets might not recover from future declines. However, the odds seem to indicate there will be an eventual recovery followed by new highs. Here are some suggestions that may help you navigate and take advantage of the recent market volatility.
Buy low. Need I say more? There hasn’t been this large of pull-back in the markets for over one year. So, what are you waiting for? If you have considered increasing your stock portfolio, start buying.
Do not sell. Wait out the recovery because it is difficult to time the markets. If you sell and the markets fall, what is the likelihood that you will purchase in time to enjoy the ride back up? Seriously, ask yourself if you have a lot of history in successfully timing the stock market. The advice of staying invested applies to many retirees as well as younger investors. For those who are retired and financially well-off, there is a good chance that some of your assets will pass through your estate and go to children and grandchildren. In that case, invest the money you plan to spend more conservatively while being more growth-oriented with the investments passing to younger heirs.
Protect your profits and limit your losses. If buying more stock isn’t right for you or you are averse to staying fully invested and waiting for a recovery, then consider using some type of stop-loss order for individual stocks and a “mental stop-loss order” for other investments. Stop-loss orders can be placed on many individual stocks. These are orders to sell when a stock drops to a certain price, thus protecting profits or limiting losses whichever the case may be. Some investments such as mutual funds are not able to be sold using stop-loss orders. If that is the case, then you have to make a “mental stop” and follow the investment closely so you can place a sell when necessary. This disciplined approach can help remove some of the emotion, and offers you a degree of protection from incurring further losses.
Adjust your portfolio. You can make changes to your portfolio in anticipation of a bull market or a bear market. For example, if you think the economy will continue to expand and the markets will move back to new highs, then you might consider buying stocks that are leveraged to a strong economy while selling defensive stocks. Also, consider selling your losers, especially if they are not moving higher on the days the stock market is up.
Consider very safe investments for your near-term income needs. It really helps investors handle the volatility of the stock market when they know their income needs for the next few years are sitting safely in the bank. For example, I will have some of my clients stagger certificates of deposits to provide income for the next two to four years. That way, they won’t have to be so concerned about the stock market’s ups and downs during that time. This strategy works well, and helps keep my clients thinking long-term with part of their investments.
No one knows the future of the stock market, real estate market or any other market. Personally, I would play the odds. That is, the United States stock markets will recover and, for our life-time, remain a pretty solid bet.
This article was written by Ken Levy, a certified financial planner professional and a principal with Levy, Daniel & McGee Wealth Management. Wells Fargo Advisors Financial Network is not a legal or tax advisor. Investment products and services through Wells Fargo Advisors Financial Network, LLC (WFAFN) Member SIPC. Levy, Daniel & McGee Wealth Management is a separate entity from WFAFN.