Sweet Emotion

When The Markets Get Shaky, Do You?

By Steven Higgins, Financial Advisor

Volatility Risk & Investment Gain – The Investor’s Compromise. 2015 has brought with it a stark reminder that markets don’t, in fact, just go up. The summer of 2011 was the last time that the U.S. stock market dropped by over 10%.  Historically, 10% corrections come around more often than Christmas, but you would have thought we were in for the Great Recession, Round 2.  While not altogether enjoyable, the stock market rift gave us a moment to see if our collective fortitude had softened over the past 4 years.  Apparently, the memory of multiple 50% stock drops over the last 15 years is fading because on multiple occasions I was told by that this correction was the “worst ever.”  Not to deflate anybody’s sense of historical relevance, but this summer’s stock drop didn’t make the top 100. 

We view volatility a bit different around here.  When the stock market starts to drop, many investors think the inevitable result is that it’s going to go lower, much lower and possibly to “0”.  The is because most people confuse different types of risk.  Volatility risk is the chance something might go up and down. Business risk is the chance some thing might go to “0”. Business risk is mitigated through diversification and volatility is actually the refined product we need to achieve the results we want. 

While certain goals require amounts of predictability, we continue to caution clients to be practical when talking about goals and the need for volatility.  Since growth is simply the part of volatility that feels good, and loss is the part that hurts, we need to remember that any measure taken to mitigate any part of volatility will mitigate all parts of volatility, even the good stuff.   

My Strategy Personal Investment Policy. Emotions affect everybody and nobody is void of the tendency to make bad decisions when fear or greed trick us.  Having a plan to practically address your own emotions can act as an “emergency kit” to keep you from making the wrong decisions for the wrong reason.  Arming yourself with an investment policy won’t keep you from getting shaken by stormy markets, but it will help you bring your practical self back to the table.  We encourage our clients to let us design a MyStrategy Personal Investment Policy to better understand and plan for goals and expectations.  The better you understand how volatility and risk play a role in your goals, the more confidence you will have when the storms come.

Diversification does not ensure a profit or guarantee against loss. Investing involves risk and you may incur a profit or a loss regardless of the strategies employed.