Staying Calm in the Volatile Markets

Staying Calm in the Volatile Markets

There really is nothing quite like price to change investor sentiment. Year after year, short-term traders make emotional decisions at the wrong moments, either fearfully selling as markets come under extreme pressure or eagerly buying after markets reflect overly optimistic outcomes. From the stock market melt-up at the start of 2018 to a near melt-down at year’s end, too many individual investors reacted emotionally, abandoning their financial plans under duress and doing serious harm to their long-term financial possibilities.

While always painful in the moment, it is important to remember that volatility is typically a short-term phenomenon measured in days, weeks and sometimes months. Experienced investors, and those who counsel them, use times like these as opportunities to routinely rebalance portfolios, as well as upgrade the quality of their portfolios, selling any poor performers and replacing them with more attractive investments that have become devalued themselves.  It is also a great time to create value through tax-loss harvesting and, for those who are still contributing to their wealth, periods of declining prices can be an opportunity to buy assets after they’ve gone “on sale”.

Most importantly though, it is critical to filter out the noise during turbulent times and make informed and rational decisions rather than fall prey to the often overwhelming herd mentality. This task is complicated by the fact that most media coverage during market downdrafts is inherently characterized by end-of-the-world rhetoric and reporting, even though actual underlying economic conditions rarely change with the same speed and severity as their talking points imply. Our own house view is that there are few indications that the economic cycle is coming to an end. Granted, the market is in the process of digesting slowing economic growth from an above-trend 3% rate back to a more modest 2% growth rate in the coming year. While a legitimate concern, short-term traders oscillated between euphoria and despondency last year, conflating normal slowing economic activity with recessionary conditions, when the reality wasn’t nearly as binary as those eye-catching headlines suggested.

Make no mistake, we fully realize how important it is to always understand where we are in the economic cycle and to invest accordingly. It is also important to acknowledge that our fundamental assessment doesn’t preclude the possibility of more dramatic market movements ahead as investors and traders alike attempt to extrapolate (and often over extrapolate) the latest economic and corporate news. But during drawdowns, it’s imperative not to head to the sidelines and wait for the issues of the moment to clear. Particularly, when historically every downturn has been followed by a recovery and a new market high for the patient, long-term investor.

That is why your asset allocation has been structured to be consistent with your unique circumstances and built to get through the occasional volatile periods. While diversified portfolios don’t guarantee profits or provide assurances that investments won’t decline in value, having confidence in your financial plan does create the opportunity to lean into market volatility when emotions are running high. After all, the real world is rarely as dire as the price action and sentiment of the moment can make you feel. But having confidence in your long-term financial plan can help you stay calm when others panic – and that is perhaps the strongest competitive advantage you have in volatile markets.

Articles and Commentary

Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.


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