Volatility: Stock market vs. your portfolio
Joel Dresang: Kyle, stock market reports are part of the daily news, and when the prices are going down the headlines get bigger. If that’s vexing investors, one of the things that you always remind them is to distinguish between the stock market and your own portfolio.
Kyle Tetting: You know, Joel, I think it’s so important for investors to remember that a balanced portfolio isn’t just those large, U.S. stocks that we see so often reported. And so just looking at those headlines often gives us a fairly poor approximation for how our portfolios are actually doing.
Joel: So how do I do that? How do I distinguish between the S&P 500 and what I’ve set aside for my own retirement?
Kyle: We can always ballpark it. We can always look at our allocation to stocks and say, “You know, I’ve got a 60% weighting to equities. The market’s down 1%. So, roughly speaking, my portfolio is down about six-tenths of a percent.” And of course, that’s a good way to maybe approximate, but it misses a couple of key points.
Joel: So what are the shortcomings of ballparking like that?
Kyle: I think the big thing that we miss is the fact that diversification can actually add to your portfolio even as the market piece, the stock piece, is detracting from it. And so you look at something like an exposure to bonds or to fixed income. Bonds tend to make a little bit of money over time when stocks are losing money.
You look at the difference between U.S. stocks and non-U.S. stocks. It isn’t enough to say, “Here is my equity exposure,” when you can break that into U.S. and non-U.S. or value and growth or small cap and large cap. All of those pieces are going to behave differently, and so to get a better understanding, you’ve got to look a little bit deeper than just ballpark. But again, I think ballpark is a good place to start.
Joel: When does all that stock market volatility really matter to me as an investor?
Kyle: So Joel, I think statement risk is this risk that you’re going to get the statement in the mail, you’re going to look at the balance and see that it’s so much less than it was the month before, and often that causes investors to react. More often, though, what we’re seeing is investors are checking in even more frequently with access online, with access to phone numbers where you can get your balance on a regular basis.
I think, you know, that puts investors at risk of regret: regret of responding to market volatility, regret of not responding to market volatility. You know, both of those things can be detrimental to the long-term performance of a portfolio, and ultimately what we’re trying to do as investors is build these regret-proof portfolios.
Joel: So when should I be responding?
Kyle: I think it’s fundamental changes in your investment strategy, fundamental changes in the underlying investments themselves, not simply response to market volatility. Important to understand that markets bounce around. It’s what they do. There is a risk to investing, there are uncertainties as part of investing, and that leads to price movement.
But when things change fundamentally, when you expect the economy to grow a little bit slower or a little bit faster, when you expect earnings to pick up pretty substantially, or interest rates to move in a different direction, that’s when you are assessing your portfolio to see what kind of changes might be needed, not simply because the price of stocks has fallen or the price of bonds has fallen.
Joel: What about my own personal circumstances?
Kyle: You know, I think so important for investors to factor in those circumstances to the initial portfolio. Again, the goal to build that regret-proof portfolio has everything to do with you as an investor and not the underlying markets themselves. The market is the second piece, but we’ve got to make sure that we’re getting you as an investor right first.
Kyle Tetting is director of research and an investment advisor at Landaas & Company.
Joel Dresang is vice president-communications at Landaas & Company.
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(initially posted December 21, 2018)