Behaving in Calm Markets

Posted by John Charles Kernodle on July 01, 2014  /   Posted in Newsletter

Six months ago, I’m not sure anyone could have predicted what we see in the markets today: a whole lot of nothing. The markets go up one day, down a little the next, but they’re basically calm, and some investors aren’t reacting very well. In fact, some investors are chasing incredibly risky investments because calm markets don’t generate the same returns as volatile markets. So they go on the hunt and make big bets on investments they’d avoid at any other time, all in the hope of generating a bigger return.

Of course, there’s no guarantee the markets will stay calm. As we know from past experience, global events can shake up the markets at any time. So it may seem like this risk-chasing isn’t a big deal. However, over time, if enough investors do it, we’ll start to see instability in the overall system. That’s a potential problem for everyone.

Notice that as the S&P 500 keeps going up, market volatility continues to drop. This big gap can make it difficult for investors to behave.

It also doesn’t help that markets with low volatility can make it very hard to stay disciplined as an investor. It’s easy to look around and wonder (1) if you should have EVERYTHING invested in stocks since they don’t feel too risky and (2) if you should explore other investments promising a really big return. In other words, it’s very tempting to put aside your financial plan and start placing bets. After all, it doesn’t feel very risky. Who needs a plan when the markets keep going up?

Moments (and temptations) like these are why you have a diversified, well-designed portfolio. It may not feel like it now, but you adopted this strategy of diversification to deal with the reality that we can’t predict what the markets will do next. They could very well keep going up, but they could just as easily take a drop. By sticking with your plan, you’re decreasing the odds of being really disappointed when things do change—and they will.

One of the hardest things for an investor to do most times is to stand still and do nothing. So I understand completely that it may feel like you should be doing something to take advantage of this situation. But it’s no wiser to chase after returns in a calm market than in a volatile market. You’ve set your goals and made your plan. Now it’s time to follow through. I’d be giving similar advice if the markets were acting crazy because that’s the point of having a financial plan.

We didn’t build your plan to only work at certain times. We built it and your portfolio with checks and balances to see you through the ups and downs and even the flat spots in the markets. Even though the headlines may suggest otherwise, now is not the time to start second guessing and exploring “alternative” investments.

You and your goals are better served by the thoughtful plan you laid out months or even years ago when you weren’t wondering if maybe you could beat the market. So this summer, instead of wasting time wondering what the markets will do next, I suggest you spend more time with family and friends, and let your financial plan take care of itself.


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