Last year was one of the most challenging years investors have seen in recent times. Thanks to the effects of geological missteps, trade tension, rising interest rates and populism, investment managers dealt with a great deal of market volatility.
When the market is volatile, investors are often tempted to take unplanned actions that are often detrimental to their goals in the long run. Instead of falling victim to the hysteria, it is best to stick with a solid long-term plan. Below are some tips to help you keep your investments secure and profitable even in the face of market volatility in 2019.
- Review your plan.
Following a solid investment plan is the best way to prevent your emotions from guiding your investment decisions. Every year, you should take the time to review your investment plans and strategies. Your plan should include short-term, intermediate and long-term goals. While short-term goals cover your investment goals for the next year or two, long-term goals focus on your objectives for your investments seven years or more into the future. As you review your plan with your advisor, consider whether your circumstances or goals have changed. If they have, consider making changes to your investment plan.
Review of your investment plan should also include an in-depth look at your overall investment allocation. Consider where all of your assets are invested, as well as the risks and returns associated with each allocation.
Having the right combination of a variety of different asset classes that don't overlap in risk is essential to ensure consistent growth. By spreading your investments around, you minimize risks, avoid short-term mistakes and earn long-term value. When diversifying, be sure that your portfolio includes both active and passive investments.
Although the "buy and hold" strategy may be common among investors, it can bring on undue risk. Don't be afraid to rebalance your portfolio. Failing to do so can expose your investments to significant losses.
Executive VP of BTS Asset Management Mark Bentley stated in his recent article Portfolio Rebalancing in a Bull Market’s Extra Innings: “….rebalancing helps investors to lock in profits and purchase assets with lower relative valuations. Furthermore, no bull market lasts forever. In a mean-reverting market, rebalancing may increase risk-adjusted return. Most importantly-and critically for anyone charged with a fiduciary duty-rebalancing is vital to maintaining a risk profile.”
Likewise, John Jackson of Callan stated: “Rebalancing is less about return enhancement and more about managing the risk relative to the target allocation.”
To keep a consistent balance in your portfolio:
- Continue to build. Use dollar cost averaging.
- Designate a specific time for rebalancing.
- Take all emotion out of the decision-making process.
- Sell from profitable positions and add to opportunistic positions.
- Establish a rebalancerange, better known as a drift factor.
- Use tax loss harvesting to your advantage.
- Stay the Course.
Making the wrong move at the wrong time could be the difference in achieving your financial goals or falling short of them. For this reason, sticking to your plan and making a consistent effort to protect your investments is essential. Be sure to:
- Speak with your advisor at least once each year.
- Remember that every market cycle is unique.
- Avoid chasing returns or playing "follow the leader"with other investors.
- Consider the big picture at all times and focus on your long-term goals.
- Re-evaluate risk on an ongoing basis.
Market volatility can provoke anxiety. However, you can prevent the volatility from derailing your investment goals by following the tips above. For more information or assistance, talk to an experienced advisor at Richard Brothers today.
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