Volatility: What investors should know
Joel Dresang: Marc, the stock market started out 2016 with a bang. Prices were falling like confetti. Should we be expecting more stock volatility this year?
Marc Amateis: Joel, I think we probably should. Maybe investors didn’t realize it, but the last couple years actually in the market have been pretty low volatility, from a historical perspective. But now you’ve got the Federal Reserve raising interest rates. We’re much later in the business cycle. The bull market’s been going on for about seven years now. Increased globalization in the investment world. So I think investors should probably prepare themselves for more volatility.
Joel: So what does that mean to investors, that the stock market is more volatile?
Marc: Well, it means that as prices go up and down more frequently and in bigger chunks, if you will, investors might become more inclined to want to just do something. And that’s dangerous. Volatility in itself doesn’t hurt you. It’s how you react to the volatility that can hurt you.
Joel: So, I imagine if an investor sees stock market prices go down severely, they might be tempted to get out at exactly the wrong time. How do they resist that temptation?
Marc: The number one way you resist that temptation is having a proper investment portfolio to begin with. If you’re not over-invested in stocks, that will help quite a bit to resist that temptation. Pressure increases on you as prices go down, and if you’re over-invested in the stock market, there’s a chance that you might want to get out at just the worst time.
Joel: And that points out when we’re talking about volatility, it’s about stock prices, and people have more in their portfolio than just stocks.
Marc: That’s right. A well-balanced portfolio has a lot of fixed income in it – bonds – and also, maybe some alternative investments like real estate or perhaps even a little bit of commodities. And those things can help to buffer what happens in the stock market.
So, if you’re able to avoid selling your stocks when they’re down, give them a chance to recover by leaning into your bonds, that should carry you through anything that we’ve been through or may face.
Joel: How about taking a long-term mentality, how does that help deal with volatility?
Marc: Investors need to have a long-term perspective because over a short period of time, the market can be very volatile.
Look at the year 2015, for example. We had some increased volatility. We had a 12½ percent decline in the market, based on the S&P 500, back in August and September. But if you look at the year as a whole, the market basically went nowhere – a slight gain for the market in 2015.
If you look at a chart of the market, the longer the time frame you look at, the smoother the graph. If you look at a one-week, a one-month chart of the stock market, you’re going to see a lot of this (gestures with his finger up and down). The longer you stretch it out, the more it’s going to smooth out. In fact, if you looked at a 100-year chart of the stock market, you’d barely see the Great Depression or the Great Recession as a blip.
Joel: Marc, what advice would you have for someone who is a retiree, especially, and they see the volatility day-to-day, and they get nervous?
Marc: The best advice I could give those people is you don’t need all your money today. If you have a properly balanced portfolio – give or take half stocks, half bonds – if the stock market does go down substantially, you’ve got plenty of money on the fixed income side to lean into to use and be able to leave stocks alone until they a chance to recover.
Remember, stocks always recover. They always have. They always will. It’s just a matter of how long it’s going to take. So if you have a properly balanced portfolio, and you’re able to draw from the fixed-income side during those time periods, you’re going to be fine. Don’t panic.
Marc Amateis is vice president and an investment advisor at Landaas & Company.
Joel Dresang is vice president-communications at Landaas & Company.
Money Talk Video by Jason Scuglik and Peter May
Corrections: A normal part of investing, a Money Talk Video with Marc Amateis
What investors need to know about volatility, from the Financial Industry Regulatory Authority
Market corrections: Always be Prepared, a Money Talk Video with Brian Kilb and Marc Amateis
Weathering a stock market correction, a Money Talk Video with Bob Landaas
(initially posted Jan. 28, 2016)