Well-Diversified Portfolios May be an Answer in Times of Market Volatility

5/25/2016 — Market volatility has picked up recently as concerns about China’s economy add to fears of a global economic slowdown.  Add to that volatility in oil prices and expectations that the U.S. Federal Reserve will gradually raise interest rates, and the result is uncertainty in the financial markets.

My view is that markets will experience elevated volatility but that there are still opportunities for investors in stocks and bonds as well as in selective non-traditional investments.

In uncertain times like these, the best thing that investors can do is to stay disciplined with a diversified portfolio.  This is a belief I have held throughout my career — including through the bursting of the dot.com bubble in the early 2000s, and more recently, the Great Recession.  The US stock market has historically proven to be one of the best mechanisms for investors to capture the economic benefits of our collective human ingenuity. Investors scarred away from the market during those times missed subsequent rebounds.  Rebounds that would’ve mitigated losses and helped their savings outpace inflation. Rather than focusing on short term noise while wondering if you need to do something now, or what the markets are doing today, it makes more sense to focus on developing and maintaining a sound investment portfolio that takes into account your future liabilities in both the short term and long term.  A good plan will help you ride out the peaks and valleys of the market, and may help you meet your financial objectives as time goes on.

Emotionally, it’s hard to avoid the temptation of chasing a bull market and fleeing from a bear market.  Enacting this behavior leads to the opposite of “buy low, sell high”, not to mention trading costs and tax implications.   What’s important to remember is that market conditions can improve or deteriorate quickly and with little notice.   Being swayed by sensational headline news can have a significant negative impact on overall investment results needed to achieve long term financial goals like assisting a child through college or funding retirement.

The sources of market volatility are always changing, which can make some investors feel like “this time it’s different– this time the market won’t come back.” For example, when markets were worried about the uncharted territory the global economy was in when oil was trading at $145 a barrel in 2008, who would have thought we would see prices drop to the $20s?  When I think about the many problems that the markets have overcome, I’m reminded of staying in the market with a solid plan.

In this volatile environment, I believe investors can be well served by having a well-diversified portfolio.  With investment comes risk, but diversifying ensures you don’t take more risk than you have to.  Portfolio diversification in non-correlated assets is a smart way to mitigate risk.  A diversified portfolio means that your money is invested across asset classes and industries and likely will include stocks, bonds, cash and other alternatives.  If you put all your investments into a single stock or one industry your risk is high.  If the industry has a setback typically the associated stocks will drop in value.

If your investments include securities that do not always move in tandem with each other, your portfolio volatility should be reduced.  However, there is no guarantee against periodic loss for a diversified portfolio spread among stocks, bonds cash and others types of investments, and I would warn investors against people who claim otherwise.  Depending on your personal situation and future financial goals, you may want to discuss with your advisor about including some non-traditional investment strategies that seek lower-volatility participation in the markets.

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Company Name: Tompkins Financial Advisors
Contact Person: Chris Kim, Chief Investment Officer
Email: CKim@tompkinsfinancial.com
Country: United States
Website: http://www.tompkinsfinancialadvisors.com/