Having A Plan for Market Volatility Can Help You Sleep Better

For savers and investors, one of the things that can keep you up at night is market volatility. During the financial crisis of 2008 or the dot-com bust of 2000-2002, many people had sleepless nights as they saw their account balances move around more than usual.

Today, we know from surveys and talking to people that there is a lot of fear that we might be “due” for another volatility event. That is creating a new sense of worry for some folks as they worry they might see their account balances fall significantly in the short-term.

First off, let us just say, there is no such thing as the markets being “due” for anything. Markets behave in ways that are usually very unpredictable. That’s why we have built Annex Wealth Management to respond to changes in the markets – even if sometimes that response is “wait and recalibrate.” We’re not trying to guess the direction of the market; we are monitoring data and planning for various potential events so that we have the ability to react quickly when something of consequence really changes.

Volatility Is Low Now, But…

volatilityToday, the volatility index is in fact near the bottom of its range. That is representative of the gently rising stock market we saw from the middle of February to the end of April. It also suggests that we could see rising volatility over the summer as the markets go through normal cyclical behavior and have some seasonal effects.

With the potential of some summer volatility, we ask one question: what’s your plan when volatility does hit again, because eventually, it will?

Many investors do not have a plan for volatility. That is why when it does hit, many people sell valuable assets at precisely the wrong time. Their emotions get the best of them.

We suggest having a plan, a process and a balanced outlook for dealing with volatility so you don’t lose sleep at night when it does happen and, just maybe, you’ll come out of it for the better.

Our Approach To Volatility

Annex Wealth Management is aware of many of the things that are wrong or potentially wrong in the world. There are also, of course, so-called “black swans” that nobody sees coming. Here are some of the negative things we do know:

  • Global debt is too high.
  • Aging demographics have a negative impact on government budgets.
  • China’s growth is slowing.
  • Japan is still in the grips of deflation.
  • Europe has problems from Greece to the banking system to the U.K. potentially leaving the European Union.
  • Emerging markets – where many expect growth to come from eventually – are still struggling.
  • Russia is Russia.
  • Iran is Iran.
  • The oil markets are in a state of flux.
  • U.S. growth is slow.

There are dozens more issues out there to monitor, all components of the proverbial “wall of worry” markets often climb.

As we have mentioned in our quarterly letters, central banks around the world and the U.S. Federal Reserve – the Fed – remain very accommodative. It’s very important to the markets that both the Fed and central banks keep interest rates low. For that reason, buying any corrections that come with volatility is probably a better plan than selling.

Warren Buffett famously said this: “…volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk.”

At Annex Wealth Management we use a “core and tactical” approach to investing. That is, some of our holdings are longer-term in nature, while others are more current market data dependent. This allows us to maintain our long-term participation in the growth of the economy, while shifting other assets to be more defensive when necessary or more aggressive when opportunity arises.

There are risks involved with investing, including possible loss of principal. Investments will fluctuate and may be worth more or less than when originally purchased. There is no assurance that any particular strategy will work under all market conditions.

No investment process is perfect, but if we can offer some protection when markets are the roughest along with an unemotional way to take advantage of opportunities when they occur, we feel we can continue to succeed over time.

Let’s turn to Buffett again: “Look at market fluctuations as your friend rather than your enemy, profit from folly rather than participate in it.”

Again, no process is perfect, but if we can control our emotions, have a plan and make small adjustments over time, we have a good chance to do well.