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NEW: Personal Finance: How to Behave in the Face of Stock Market Volatility

Wednesday, January 07, 2015

 

The stock market, both in the US and abroad, has been turbulent again of late.  On Monday, January 5, the Dow Jones Index dropped over 130 points, or 0.75%, and yesterday, January 6, it dropped another 319 points, or 1.8%.  Clearly 2015 has gotten off to a rocky start.  As I write this the Dow is up about 132 points, but the day is not over.

Market volatility is nothing new and is an inherent aspect of how markets behave.  It never fails to happen, however, that financial pundits seize on these events as if they were novel and speculate about their significance.  They often quote so-called “experts” regarding the actions that investors should be taking in response.

Reporters often solicit advisor opinion at times like these regarding the advice we would give an individual investor. My replies to these requests are typically a variant of the one below, from an actual exchange I had not long ago with such a reporter.

Reporter Question:

Right now I’m working on a follow up piece about the Doomsday Portfolio.

I know advisers tend to tell clients to stay the course – but wondering if you have any thoughts on what should someone do if they really think the sky is falling ... Gold, silver, short the market?

World War Z, I realize, but an interesting question to ponder.

My Reply:

“I hate to sound like a broken record but the reason individual investors underperform the market is that they allow emotion and media noise to dictate their actions. I am sure you have seen the annual Dalbar studies demonstrating that the typical investor would have done better by staying consistently invested rather than by timing buy and sell decisions based on their perception of where the market was heading next.

There is a market premium for a reason. Being invested at times like these is, in a sense, the cost for reaping greater returns over the long run. You cannot enjoy the return without “paying” for it by enduring the risk.

A key to success is modulating the level of investment risk such that it is easier to ride out the inevitable rough patches. Making sure one has sufficient liquidity to avoid having to sell depressed assets to meet current expenses is also critical.

The alternative strategies you mention are all different forms of speculation, not investing. Engaging in this kind of speculative behavior is akin to gambling and is a recipe for failure.

Staying the course is not easy and requires a lot of fortitude and perspective. This is where a good advisor can add great value.

The above is definitely not sexy or what a lot of folks want to hear but IMHO is the kind of advice called for in times like these.”

Prudent advice to "hold the course" does not sell a lot of ads.  Not surprisingly, this reporter, probably sensing my low opinion of financial punditry, did not use my input in her piece.  I believe this is unfortunate and one of the reasons why it is so hard for individual investors to obtain the information they need to avoid succumbing to the fear and emotion that leads to bad investment decisions.

Times like this can test the resolve of even the most stalwart investor among us.  I offer the above as my attempt to add a small voice of reason to the echo chamber.  I hope it helps you tune out the pundits and stick to your investment strategy, if you have one, or seek out the help of a good advisor if you don't.

Readers with questions on personal finance and Social Security can email Joe Alfonso at [email protected].

Joe Alfonso, CFP®, ChFC, EA regularly writes on financial topics and is an expert on Social Security planning. He is founder of the Fee-Only financial planning firm Aegis Financial Advisory in Lake Oswego, Ore., and is the principal advisor for the firm. Joe is a CERTIFIED FINANCIAL PLANNER™ professional and an Enrolled Agent, admitted to practice before the IRS to represent taxpayers at all administrative levels for audits, collections, and appeals. He is a member of The National Association of Personal Financial Advisors (NAPFA).

 

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