The US Stock market has gone practically nowhere in the last year or so. The recent market volatility has sent a rude awakening to some investors; snapping them out of their Fall TV and sports watching.
There is renewed interest in all things stock market and money right now. We want to offer a few thoughts on what can be done about the inevitable emotional pain that arises from dreaded market volatility.
In investing lingo dealing with market volatility is called “Hedging” or “Risk Management” and it can take many forms. In their simplest form, “hedging” and “risk management” are used to keep us from making big, often emotional short-term investing decisions. These decisions can have big, often negative long-term investing impacts.
Here are 4 potential ways to “Hedge” or “Manage” investment risk:
- Don’t invest 100% in stocks.
We discourage investing in 100% stocks. It is also very rare that we have a client who is 100% invested in stocks. Even the boldest investors get weak knees when a 100% stock portfolio gets cut by 20-50%. A great way to hedge is to not take so much risk in the first place. Not taking on so much risk is a great way to remain calm when the waters get murky.
- Don’t limit yourself to U.S. Stock and Bond markets.
In many ways this is an easy way to stay in the game without trying to time the markets. Foreign equities are less expensive than US shares and Foreign Bonds are more expensive than US shares. Why care? Why not hold a mix and let go of trying to time which market is right? In general, diversification away from just one market improves the probability of both stability and success.
- Automate and simplify investing strategies.
Dollar cost averaging, reinvesting dividends and interest into a predetermined asset allocation, and creating long-term regular patterns of investing all smooth out the volatility of portfolios. It helps you take your mind off the ebbs and flows of the stock market when things are automated for you. Automation and simplification also removes a lot of the emotional guess work and allows a focus on longer-term goals.
- Find your “sleeping point”.
A famous saying in investing is “sell down to the sleeping point”.
The idea is if you own investments that are keeping you up at night, sell enough of them and put the money in “guaranteed” investments so you can sleep. “Guarantees” can be cash, high grade bonds, insurance products, etc. These investments promise to return your money and often provide possible appreciation and interest or both. When you find your sleeping point, stock market volatility is less of a concern. You will feel confident your bases are covered and your nest egg is protected. And don’t worry, your stock investments can take their time recovering while you wait it out.
“Hedging” and “risk management” is what you do before and when the stock market is having a temper tantrum. You don’t need to ebb and flow with it, you can choose ahead of time and in the moment to protect yourself from the crazy.