Stock Market Volatility: Acting vs. ReactingSubmitted by JMB Financial Managers on January 25th, 2019
It’s in the news, in the headlines, and more than likely, in your portfolio. Stock market gyrations can be worrisome for any investor - but it doesn't have to be. When it comes to investing I always like to remind my clients that it is better to have a plan of action, than a knee-jerk reaction. This – a plan of action - is what I call active risk management.
Market Downturns are Inevitable
As you likely already know, the various markets will come down in value at some point in time. Whether caused by changes in the economy, unexpected moves in a foreign currency, or international trade tensions, market declines are inevitable. Knowing this to be the case, it is important to be prepared ahead of time. This involves understanding risk, and having a plan to manage it.
No matter what your portfolio, it’s important to note that there is some facet of risk involved in every investment decision you make, big or small. For investors in the accumulation stage of life, volatility is generally considered the primary source of risk. For investors closing in on their goal – those within 1 to 3 years of retirement, for example – drawdown is the most important source of risk. For those already drawing upon their investments, longevity is the largest risk. Ultimately, you can see that the definition of risk, and the source of it, changes over time as you change. Alongside these three issues is your own, unique investment personality and it is important to understand how they are tied together. Take a moment to click below for an evaluation of where you stand on the risk spectrum:
The Need for Risk Management
One exceptionally important reason you should consider employing a risk management strategy, is that it takes the emotions out of stock market volatility, portfolio drawdowns, and longevity exposure. When the markets are down, your portfolio is down, and you are concerned about outliving your nest egg, it is easy to let your emotions get the best of you – often causing a rash investment decision.
Risk management becomes exceptionally important when you are closing in on, and first entering retirement. Market volatility combined with regular withdrawals can make market losses significantly harder to recover from.
Having a financial professional versed in active risk management can be an antidote to knee-jerk investment decisions causing inappropriate volatility in your portfolio.
What is Risk Management?
Simply put, active risk management is having a plan to monitor and adjust portfolio risk as the economy, the markets, and your needs change through time. It is making changes to your portfolio when necessary to reduce your downside exposure whenever appropriate to do so, while also staying out of the way and letting the portfolio grow as often as possible..
By linking portfolio design and investment strategy directly to the investment risks you face, your investment personality, and outcomes you are seeking, you can maximize the probability of achieving those outcomes.