MANAGING RISK & VOLATILITY

Many of us invest in stocks for their ability to grow our wealth. When volatility rears its ugly head, our instinct is to take our money out of the market to safeguard it. However, history shows that rather than giving in to fear, staying invested and buying stocks during volatile times can be beneficial in the long run.

Volatility is, by definition, a rapid and unpredictable change. It’s not an enjoyable experience. But there’s something to be said about staying the course despite the discomfort.

While volatility is difficult to endure, it can present opportunities for long-term investors. When the broad sentiment is fear and others are selling, it may be time to be contrarian: consider it an opportunity to not only stay invested, but to buy while prices are depressed.

Volatility creates opportunity. It is easy to say volatility and market dips work themselves out in time, but we realize it is much harder to experience in reality. It can be incredibly difficult to watch a hard-earned portfolio lose value, no matter how much of a buying opportunity it presents. And in today’s world of instant gratification, it can be difficult to keep in mind you’re more likely to recoup those losses over time, not immediately.

Another advantage to resisting fear is that it’s impossible to tell when the market will resume its upward course after a bout of volatility. Remaining invested during a market dip means participating in the recovery as soon as it happens, rather than waiting until things seem to be back on track and missing the beginning of the turnaround.

A well-diversified portfolio containing a broad mix of equities, bonds and cash will likely be less volatile over the long term than a portfolio concentrated in only a few investments. In a welldiversified portfolio, losses in one area tend to be offset with gains in other areas. For example, bonds and stocks often move continued on page 14 continued from page 12 in opposite directions. On the other hand, in a concentrated equity-only portfolio, both losses and gains can have a bigger impact. If you want to mitigate the level of volatility in your portfolio, diversification is one of the keys. And with interest rates at levels we haven’t seen in over a decade, bonds can offer a level of comfort along with a more predictable rate of return.

Another approach that can help ease concern over volatility is dollar-cost averaging. This strategy involves investing a predetermined amount on a set schedule—say, every month or every quarter—regardless of market conditions. No need to worry about whether prices are heading up or down, because this mechanical process eliminates emotion. You’ll naturally buy more shares when prices are lower, and less when prices are higher.

Avoid following herd mentality. When you have a portfolio based on a long-term outlook, there’s less of a need to respond to short-term events. According to behavioral finance, herd behavior may be a psychological trap. For example, based on negative economic news, some investors decide to sell. Others are spooked by that trend and follow suit, and suddenly there is a major correction as a big crowd of investors dump their shares. Rather than follow the herd, investors are often better off staying the course, and simply waiting for prices to recover. It can be hard to sit tight when pessimism prevails, but such a rational response could spare you the pain of locking in a permanent loss. Similarly, in periods of market euphoria, following the herd can lead people into adding overhyped and subsequently overpriced investments.

Three keys to help manage a portfolio in volatile (and notso-volatile) times are to manage risk, keep time horizons in mind and diversify. That means a rebalance of portfolios on a regular basis.

That’s why it’s critical to be proactive by working with your financial advisor to put a solid, long-term financial plan in place. By doing so, you can build a portfolio that’s allocated according to your personal risk tolerances, which can help you stay confident no matter the market’s movements. And when you’re confident, you can be the contrarian who sees the opportunity in fear.

Scenarios illustrated are hypothetical in nature, results may vary. Investing is subject to risk which may involve loss of principal. Past performance is not indicative of future results.

The M3 Wealth Management Office does not provide legal or tax advice. Consult an attorney or tax professional regarding your specific situation. The information herein is general and educational in nature and should not be considered legal or tax advice.

Michael J. Donnellan specializes in stock selection and retirement planning. Feel free to contact him with any questions or comments at the M3 Wealth Management office at 17601 W. 130th Street – Suite 1 in North Royalton, Ohio.

Phone number (440) 652-6370

Email: donnellan@m3wealthmanagement.com

Securities and advisory services offered through L.M. Kohn & Company

Registered Broker/Dealer Member FINRA/SIPC/MSRB

10151 Carver Rd. Suite 100 – Cincinnati, Ohio 45242

(800) 478-0788