New York Life | August 20, 2020
In times of disconcerting levels of market volatility, you could be forgiven for losing confidence in the potential of your portfolio to secure your financial future. However, by keeping calm and focused, and making considered adjustments to your finances and investments, you can put yourself in a good position to weather a more difficult outlook.
Ubiquitous social media and 24-hour rolling news can leave us overwhelmed with information about the financial markets and the wider economy (remember that these are two different things). In these turbulent times it’s easy to feel paralyzed by a sense of powerlessness. The best thing you can do is lift your eyes to the horizon to gain some perspective, then turn your attention to what you can control: adapting your financial strategy to weather the short term while keeping a clear focus on your ultimate investment goal.
For most people, the sudden and unexpected nature of the economic crisis caused by COVID-19 pushed the mental button marked ‘loss aversion’. It’s important not to take a blanket approach on all your investments, but for anyone with an investment horizon of more than five years, staying in the market is far less likely to damage your finances in the long term. Many financial professionals would counsel you against selling impulsively in a down market or otherwise trying to time the market, particularly if you have a sound investment strategy and long-term financial approach. We would always recommend speaking to a qualified financial professional for advice specific to your situation.
When we see the word volatility it’s usually in a negative context. However, market volatility is simply the range of price change of an investment over time, so without some volatility we’d never make money on our investments at all. It’s important to consider your overall financial situation and see whether your attitude toward risk has changed. You may decide you need to take a more defensive position. On the other hand, a low-price environment may represent an opportunity.
In uncertain times, holding a range of different assets becomes even more important. That makes it more critical than ever to diversify, not just by holding different asset classes (equity and cash or cash equivalents) but by investing in different industry sectors, geographic regions, company sizes (e.g. small-cap vs large-cap) and valuations (e.g. value vs growth investments). Diversification has the potential to help reduce your losses during down markets and to reduce volatility of your portfolio.
While there are some general rules about what tends to perform better in a recession, in a complex and highly-connected world, actual market behavior is becoming increasingly hard to navigate—even for seasoned investors. At the same time, the ever-increasing range of financial products available, while welcome and potentially extremely useful, can be difficult and time-consuming to navigate. Even if you have invested successfully in the past, now may be the time to consider taking professional guidance. That way you can ensure your portfolio is well-balanced and diversified with a defensive slant to see you through and keep you on track.
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