Multi-Unit Franchisee Magazine Issue I, 2016 | Page 76
InvestmentInsights BY CAROL M. SCHLEIF
Maintain Equanimity
Learning to prosper from market volatility
A
s we saw in graphic detail this
past August–October, interim
market swings in both directions can be violent. Major
markets around the globe experienced
their first correction in more than half a
decade, only to make it all back up and
then some within a couple of weeks. Assets hit the hardest on the way down (e.g.,
emerging market equities and tech stocks)
were among the largest gainers on the
way back up. Such whipsaws once were
commonplace, though markets in recent
years had not seen that level of volatility
and had become frustratingly complacent.
For those with a sound plan in place,
interim market volatility can represent
potential versus overt risk, as it allows the
nimble to initiate or add to high-quality
assets that become unduly stressed amid
near-term panic. A few core strategies can
help keep one’s perspective in view.
• Plan and prepare. We are admonished in so many areas in life to commit
our goals to paper, yet few of us actually
do. With investing, however, this step is
vital. Invest time to think through what
you expect your investment funds to do
for you. Be specific. For example: I need
Pot A to fund my retirement in 2035; Pot
B for the grandchildren’s college; Pot C for
a rainy day and to fund the down payment
on a second home next spring; and Pot D
to hold the leftover “legacy” money. Investment in Pot A can take a longer view and
withstand more day-to-day volatility with
the goal of long-term growth. Money that
may be needed in the near term, such as
that in Pot C, should be held in extremely
stable and liquid cash or cash equivalents.
Be as specific as you can about your needs
and intentions. Quantify the time frames
and amounts needed. Consider separate
account buckets to help you mentally
account for the differing goals and needs
each represents.
• Have realistic expectations. Margin
(either on brokerage accounts or unspent
HELOCs) isn’t the same thing as cash
and shouldn’t show up on the “asset” side
of your mental balance sheet. Just think
back to the recent financial crisis and the
pain felt by so many over-leveraged, suddenly underwater homeowners. Leverage
74
seems nice on the upside, as it can magnify
returns, but it works the same way going
down—and we’ve already established that
the downside is a lot more painful than the
upside is fun. Also, be sure your expectations for asset class returns are realistic. For
example, to expect fixed income returns
over the next five years to be as healthy
as they have been over the past five isn’t
realistic, given that a preponderance of
global fixed income instruments are already trading with negative yields—even
For those with
a sound plan in
place, interim
market volatility
can represent
potential versus
overt risk.
as central bankers in the U.S. begin to
raise rates. It’s a mathematical given that
when rates rise, bond prices will decline.
• Diversify. Despite Wall Street’s
relentless search for the ultimate “black
box” to reliably predict market outcomes,
market pundits remain as unable to accurately predict as ever. The best antidote
for this inability to see reliably into the
future is to populate one’s portfolio with
assets that will do well in a variety of potential outcomes. For example, if you believe inflation will increase, by all means
put assets in your portfolio that should do
well in such an environment. But on the
outside chance you are wrong, consider
owning some investments that would do
well in low inflationary or even deflationary environments.
Further, actively seek readings and
conversations with those whose opinions
run counter to yours. Stay open-minded in
asking “What if they’re right? Where are
the grains of truth in their arguments?”
Well-rounded portfolios and well-rounded
income streams can help smooth the ride.
Further, it’s important to remember that
economic fundamentals and market move-
ments don’t have to “match.” In fact, the
stock market is a component of the leading economic indicator series, meaning it
is often out of sync with economic reality. Stock markets often start to rally not
when things look rosy, but when they are
“less bad.” A frequent conversation among
technical analysts, for example, notes that
when a market stops going down and stabilizes or rises even as bad news continues to flow—it’s probably worth a look.
Indeed, most great long-term investment
calls start from a place of mild to acute
discomfort—not a place of comfort.
• Focus on what you can control.
The popular financial media—with its
24/7/365 pipeline to fill—breathlessly
implies that there is some rational explanation for every market or asset price
movement. Quite frequently, however,
other explanations like “light trading volume on a pre-holiday/vacation day” can
move prices—irrespective of underlying
fundamentals, creating a great deal of interim noise. Paying attention to the daily
din can easily lead to “short-termism” and
reactionary impulses, given our innate
(prehistoric) wiring aimed at insuring our
survival. This is where having your goals
and plans written down, so you can refer to
them when things get hairy, is so helpful.
Further, teach yourself to focus on what
you can control. Things like fees paid, tax
sensitivity of you