Can I Prepare for the Unforeseeable?

Investors of any experience level know that the markets never move in a straight line. They ebb and flow, and, despite the sea of analyses, predictions, and trading strategies, having a confident ongoing idea of what the market is doing is ever elusive.

The flamboyant World War 2 General, George S. Patton, said, “Prepare for the unknown by studying how others in the past have coped with the unforeseeable and the unpredictable.”.  He was not offering that advice to investors, but it might be good investment advice, all the same.

Though nerve-racking at times, market volatility can still be effectively planned for and managed. And with the proper understanding of volatility and portfolio strategy, you can ride the waves of the market to wealth. Staying informed is also essential. 

Read on to learn how.

 

Keeping Your Money Safe & You Feeling Secure is the Priority of Lincomb-Williams. Connect with our Trusted Team of Advisors and Fiduciaries.

 

Remember: Market Volatility is Not Risk

Though many pundits look at market volatility negatively, it’s neither bad nor good. Strictly speaking, market volatility is simply a measurement of the variation of returns for investments over time. Though rapid price changes can be challenging to watch, they aren’t necessarily the same as risk. A newer company with an unproven track record can be seen as volatile, even though it can consistently deliver profits. 

So how do you manage market volatility?  In our 50+ years of working with families on their portfolio strategies, we think we’ve learned to rely upon a few key principles.

 

Use an Asset Allocation Strategy

The investing world is vast. It’s made up of numerous asset categories, each with its own set of risks, returns, and market dynamics. You can easily pick from stocks, (large-cap, small-cap, international), bonds (taxable and tax-free), cash equivalents, and alternatives to generate your portfolio returns. 

Important to recognize is that these different assets don’t necessarily move in the same direction at the same time. When markets are down, some of these investments can move upward or perhaps just remain stable and not move at all. The good news is you can use this to your advantage.

The act of distributing your money between several different assets with different risk levels and price movements is described as asset allocation.

 

Asset Allocation Keeps Your Portfolio Balanced 

If you use an asset allocation strategy, you’ll avoid the risk of putting all of your financial eggs in one basket. If markets fall, you can protect portions of your invested capital while still participating in certain market gains.

When using an asset allocation strategy, you (or your financial advisor) will distribute your money to different asset classes in specific percentages, based on your risk level, time, horizon, and future goals.

For example, a moderately aggressive portfolio may require 60% of your asset in stocks (further divided between large-cap, small-cap, and international), 30% bonds (government or corporate), and 10% in cash investments (money markets). This particular strategy can help you achieve market gains but does provide some form of protection if markets become volatile. For example, if the stock market declines markedly (like in the spring of 2020 on pandemic fears) and you needed to extract some cash from your portfolio, this 60-30-10 mix would leave you with about 40% of your portfolio in a position that was not down nearly as dramatically as your stocks.  But this particular mix is not magic; it is just one of many possible asset allocation strategies.

 

Portfolio Diversification

Splitting your money in this manner can be an appropriate way to diversify and hold different investments if markets become volatile and unpredictable. 

For example, suppose that you are a long-term investor and are comfortable taking on a certain level of risk to achieve growth. This means that you’ll have at least a fair portion of your portfolio invested in stocks hoping for equity market returns. With a diversified strategy, you would also devote at least some modest part of your portfolio to bonds. 

Why? Because when investors are confident about the market, they pile their money into stocks, making stock prices go up. But when markets are uncertain, or investors lose confidence, they sell their stocks (causing prices to fall or flatten) and then dump their money into bonds, which tends to cause bond prices to rise.

Asset allocation and diversification strategies can protect you from feeling the full severity of market volatility or, worse–an actual market downturn.

 

Trading Strategies in a Volatile Market

There are sub-categories of investments categories to add even more precision to your investments. Though all stocks, for example, can fall into the equities category, not all stocks are created or treated equally. 

Large-cap (so-called “Blue Chip”) stocks have tended to experience less volatility in the long run due to their track record and years of profits. In contrast, the small-cap stocks of smaller firms can be more quickly affected by economic activity and can see rapid disruptions in their revenue. 

 

Calibrate Your Risk Level

If you want to own stocks but maybe want to dial down your risk, you can put the majority of the money allocated to stocks in the sizeable cap-stock category, focused on companies with lower-than-average risk (measured by beta or standard deviation). 

You can also utilize a similar strategy for bonds. You can look at non-treasury bonds or even venture into overseas bonds to dial up the risk. Ultimately, what matters is that you follow your prescribed portfolio allocation percentages, which makes it very clear how much money to put in certain asset classes.  This is an area where a pure fiduciary advisor like Linscomb & Williams can offer you unbiased counsel on the right investment mix to meet your goals and risk tolerance.

 

Economic Conditions

While the most significant determinant of your investment choices is your unique goals, assets, risk preferences, and time horizons, your financial advisor can also help you better protect your portfolio based on the current economy. 

 

Inflation in 2022

One of the most significant hot-button issues in today’s market is inflation. Short-term measures of inflation reached 7% in December 2021 and while those levels may not sustain themselves, many economists expect inflation to remain high throughout 2022. With this in mind, rising prices can negatively affect fixed returns, like the interest you receive from bonds.  That is an important consideration in thinking about your portfolio’s asset allocation.

Nevertheless, some assets and trading strategies can withstand or even benefit from rising inflation, like treasury inflation-protected securities (TIPS), consumer staple stocks (companies that sell goods consumers must buy throughout the year and which are well-positioned to pass along price increases), and more.

So, investors looking for inflation protection can devote a portion of their stock allocation strategy to inflation-resistant stocks. This same rationale can apply to many other economic conditions as well.

 

Work With Your Advisor to Manage Market Volatility

Though asset allocation and diversification may seem complex, your trusted Atlanta, GA financial advisor is perfectly suited to help you construct your ideal portfolio. After discussing your financial goals, risk preferences, time horizon, and more, your advisor can formulate a financial plan and investment strategy. If you feel any hesitation in getting started, download our free eBook to Answer 6 Common Questions.

You can rest assured that not only will your investments be positioned for future growth, but they can also help preserve your assets and get a handle on market volatility. We’ve been in business for over half a century! Learn more about Linscomb-Williams and read our promise to you.

Let's talk about how stock market volatility is impacting you, and what to do about it! Set up a call now.

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MaryJane M. LeCroy, CFP®

MaryJane M. LeCroy, CFP®

As a member of our Atlanta team, MaryJane M. LeCroy is a Managing Director and Senior Wealth Advisor for Linscomb & Williams.

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Investment Advisory Services are offered by Linscomb & Williams, an SEC registered investment adviser, and a subsidiary of Cadence Bank. Linscomb & Williams (L&W) provides financial planning, investment management, and retirement plan and investment consulting services. L&W is not an accounting firm, and does not provide tax, legal or accounting advice.

Information expressed herein is based upon opinions and views of L&W and information obtained from third-party sources that Linscomb & Williams believes to be reliable, but Linscomb & Williams makes no representation or warranty with respect to the accuracy or completeness of such information. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.