Lineweaver Financial Group
Preparing for Market Volatility
Managing your retirement assets in a period of market volatility
If you follow the financial news, it comes as no surprise to you that the Dow Jones Industrial Average and the S&P 500 both have recently hit record levels. It doesn’t seem that long ago that we were all concerned about the financial crisis, but the market has now seen gains for the last five years. However, now is not the time to be complacent.
Coupled with market highs, we have recently witnessed increased volatility. A long list of concerns has recently increased ongoing instability in the financial markets. Concerns include a slowdown in China, weakening European economies, the strength of the dollar, border issues between Russia and Ukraine, ISIS, when and how much the Fed will raise interest rates, and Ebola. Financial markets don’t like uncertainty; but let’s face it, uncertainty is not going away. Investors should keep this volatility in perspective. Pullbacks of 5% to 10%, which we saw this past fall, are occurring more frequently. Investors have to understand market volatility is the new norm.
To illustrate, during this past fall the Dow Jones Industrial Average’s 275 point gain on Wednesday, October 8, was the biggest one-day rally in 2014; while the 335 point pullback on Thursday, October 9 was the worst one-day decline in 2014. This was the first time in 17 years that the biggest one-day gain and decline occurred in back-to-back sessions, and spoke volumes about the market’s recent volatility.
When markets become volatile, investors frequently let emotions rule their investment decisions and attempt to head for safe cover. This only increases the problem, which causes additional fear. But the impulse to let emotions rule and sell can make it difficult for investors to meet their investment goals. We believe the recent market volatility is primarily driven by fear, not fundamentals.
Despite recent hiccups, most U.S. economic indicators continue to signal that the economy is expanding. A strong labor market, coupled with a decline in gasoline prices, should provide a boost to consumer income and spending. However, the recent and ongoing turbulence in the market has investors questioning how they should strategize for the long term. Rather than reacting emotionally and panicking by running for the door, a better approach might be to think through what one's risk appetite might be and adjust your asset allocation gradually, probably to something more conservative but not giving up the chance for some upside potential.
Now is a great time to revisit the Rule of 100 and make sure you are not assuming too much risk with your deferred compensation and other retirement assets. We have long preached that you need to follow this rule. Take 100 and subtract your age, and the resulting number is the maximum percentage of your assets that should be at risk. The gains in the markets over the past five years may have increased your percentage of equities in your portfolio higher than you want or need. It might be a great time to consider rebalancing your portfolio, and possibly lock-in some of the gains that until now were just paper gains.
No one knows exactly how this year will play out. But the prudent response for long-term investors is tried and tested: focus on fundamentals and hold a balanced, well-diversified portfolio. If you haven’t looked at your deferred compensation account recently, now may be the time to ensure you are properly allocated. If you have questions on how to do this and want to make sure you are prepared for this ongoing period of market volatility, call our office to schedule a complimentary review with one of our advisors.
Lineweaver Financial Group s 9035 Sweet Valley Drive s Valley View, OH 44125 s 216.520.1711
Securities offered through Triad Advisors, Member FINRA/SIPC. Advisory services offered through Lineweaver Wealth Advisors, LLC. Lineweaver Wealth Advisors is not affiliated with Triad Advisors.
Asset allocation does not ensure a profit or guarantee against loss; it is a method used to help manage risk.