JFL Blog

This is some blog description about this site

Thoughts on the current market volatility

A long time ago I was a ski instructor…when I was skinny and had more hair.  The biggest issue that I would see with beginner skiers is that they would always be looking at their skis instead of down the hill.  By doing this, they were always reacting to problems happening now, as opposed to the more advanced skier who was looking down the hill and simply avoiding the problems.  Avoiding the problems is a lot easier and a heck of a lot less stressful.

As you are all aware, there was a pretty big selloff in the stock market last week that resulted in the Dow dropping 5.82%, the Nasdaq 6.78%, and the S&P 5.77%.  It was the worst week for the US stock market for the year and oil prices dipped below $40 a barrel.  This was driven mainly due to a report from China that showed factory activity at a 6 year low.  They are not sure if China can maintain 7% growth annually like they have been doing.

So here are my thoughts.  Any time I sit down with an individual discussing how to set up a portfolio, we first discuss the potential pain that’s associated with investments.  The reason why I ask is so that they can invest within their pain threshold, and remain consistent in their long term approach.  The stock market goes up and down, but over time, it goes up!  The only way to get average returns that you are aiming for is to remain consistent and not sell every time there is a little dip in the market.

So what does this mean?  A 100% stock portfolio (S&P 500) had its largest loss in 2008 with a 42.9% drop.  So if you so not want to experience 42.9% losses, you should not be invested 100% in the S&P 500!  If the most you are willing to lose is let’s say 20%, then you should not be more than 45% stocks!  So the first thing you need to do is look at your asset allocation and make sure that you are within your “pain threshold”!

Second- can China sustain 7% annual growth for ever….no.  Nobody can, so yes that will create some volatility.  Also, we have had a huge 6 year market run-up and it is very reasonable to see some form of correction, definitely.  So should we change our asset allocation and move into cash….no!  If you are invested within your pain threshold, remain consistent in your approach.

Here is what is making me feel much better.  First, the US job market continues to get better…slowly but consistently.  If people have jobs, they spend money, which helps the economy.  Second, the housing market is also continuing to get better.  This stimulates local jobs in the US economy as well.  Third, companies and especially the banks are much better capitalized then they were back in 2008.  Market volatility has less of an impact then it did back in 2008.

If you are living on your income at this time, the most important thing are not rates of return….it I is cash flow.  If you have protected your cash flow, this allows you to ride through this and not sell investments at a loss.  Everything corrects itself over time and you will be fine.  

For those investing, take advantage of this dip and continue to buy, and if possible, accelerate your buying.  The stock market historically is the only thing people do not buy on sale.  If you are in a 401(k) plan, continue investing and make sure that the account is set up to automatically rebalance so we are taking advantage of these dips.  The best time to invest in my mind is during a volatile market with a long term horizon.

I realize that most people walking into my office for the first time expect me to get them out of the market right before it drops, then get them back in right before it comes back up.  That is not an option and I have never met any investment manager that could do this effectively!  Also, if they could do it effectively, why would then ever do it for you?  Wouldn’t they just do it for themselves, make a billion dollars, and take time off with their family?  If you are meeting with someone who says that they can do this effectively….run!  

Market volatility makes you look at your overall plan and see how it works under bad conditions.  Here are a few rules that I always suggest we stick to.

1)Cash is King!- I don’t care that it is getting .25%...it’s not designed to do much more than that.  Cash is the foundation of any financial plan and it is what gets you through any bad times in your life and allows you to take advantage of opportunities during market dips.

2)Consistent approach- invest always, remain consistent in your asset allocation, over time reduce the risk (stock allocation), and take advantage of opportunities (such as market dips).

3)Never make an emotional decision with money!  Money does not care.  Take a step back and think about your approach.  If it based upon logic or emotion.  Emotional investing will get you destroyed.

4)Don’t look at the market daily and don’t listen to the business news.  Bad news sells and it keeps you tied to the TV, watching their ads and making them money.  Look at this quarterly so that you are not seeing as much volatility…just the trends.

So yes, big spikes are always concerning but never change your long term strategy over a short term situation.  Just as I would tell my beginner skiers, look farther out then right in front of your face and things get a lot easier over time.

Work with one of NJs top financial planning firms!
Taxes: Are Bill and Hillary paying too much?


No comments made yet. Be the first to submit a comment

Contact Us

305 West Main Street
Boonton, NJ 07005
TEL. 973-439-1190
FAX. 973-588-4880