Volatility is in the air. After a long period of very stable and seemingly predictable markets, the swings have returned. As a planner at Financial Finesse, I have the privilege of getting real-time feedback on how market news affects the investing public’s decisions since our service offers financial coaching to employee populations across the country.
We know that when there is any market shift, our phones will light up with questions about what to do. The answer to a lot of these questions is simple. Market news and market change do not necessarily imply a change in your investment strategy.
In times like these, it is tempting to try and guess where the market will be in the next 6 months, 1 year and even 5 years. One problem with that is it that you can find plenty of market pundits and economists on either side. But what if you have a really good idea of what you will think will happen in the market? You still have an even more difficult hurdle to cross, and that is the question of timing.
A cautionary tale about market predictions
In the mid-2000s, there were only a few well-known market makers predicting a substantial recession. One bond manager made a prediction that would end up being a blow by blow prediction of the great recession of 2008. The issue was he began sounding the alarm in 2005 and 2006. This left investors with a choice. When should you react and how should you react to a market prediction?
You cannot count on market predictions
Now the first thing to keep in mind about this market prediction is that it was fairly unique because it was correct. The flip side is it could have been a wrong prediction. In fact, this fund manager has predicted similar recessions would occur again since 2011. Consider the opportunities an investor would have lost in the meantime. In fact, ever since the end of the last recession, there have been significant warnings about a bond bubble due to rising interest rates and other forms of economic collapse for various reasons.
Almost as important as “what” is “when”
Notice I mentioned that very prophetic market prediction coming out in 2005 and 2006. If an investor pulled their funds out of the market because of this prediction, they would have missed multiple positive years in the market. The problem of anticipating can compound. What if you hastily moved out of the market based on a market prediction only to notice that after a couple of years you are missing good market returns?
What if you jumped back into the market after frustration? What if you jumped back in 2007? You would have missed the uptick and walked straight into a downturn.
What’s your plan?
You can see how difficult it is to time the market. The easiest way to deal with a frothy market is to have a strategy in place that anticipates the unpredictability of ups and downs. Here are a few methods that help.
Using an asset allocation fund
An asset allocation fund can help you maintain an investment mix suited to your risk tolerance. A static allocation fund can help you stick to a desired portfolio over time while target-date funds place you in a strategy that becomes more conservative as you approach your goal. These funds are helpful for investors who would rather not create their own portfolios. It also takes away the responsibility for rebalancing from you since it would be done automatically.
Over time, certain asset classes outperform others. If you’re a “hands-on” investor, you’ll need to personally make some adjustments at least annually to get back to your target asset allocation. You will want to periodically sell some of the high performers and buy the underperformers. This process forces you to sell high and buy low. Many employers also offer automatic rebalancing and professional account management for their retirement plans.
Working with a planner
Working with a planner can be very helpful in terms of developing your risk tolerance and balancing the right investment strategy for you. Check your employer to see if they offer a financial wellness program. You may be able to get the services of a planner covered by them. (Before Financial Finesse, I charged $2,500- $5,000 a year for my services.) If not, you can also ask for planner referrals in your local community and interview them to find the right fit.