Much of what the investment world relies upon for making decisions is financial market predictability and historical performance. Economists and researchers collect data from past stock market crashes, compare them, and come to reliable assertions about how each asset class is expected to respond to market stresses in the future. Traditionally speaking, whenever equity markets fall, investors respond by transferring more of their assets to fixed income, debt, and cash products which are considered lower risk.
Market research analysts compile data based on sets of variables and predict the range over which asset types might lose (or gain) value when stock markets experience broad capital losses. They look at how long it takes for a financial sector to rebound or how far it falls before beginning to rebound. Some basic rules do apply. Fixed income securities tend to do better when equity markets fall. Good performing stock markets encourage additional investment, which drives prices up.
What they cannot do much with is a newer trend of social media impacting the market. Recently, we’ve seen instability introduced into the markets when major political leaders communicate wild opinions about publicly traded companies and the Federal Reserve via social media posts. This is new terrain for financial analysts. With the unpredictably we are currently facing from foreign trade policies and Twitter accounts, you may be asking: What can I do as an investor to lessen the impact of stock market volatility?
What are safe-haven currencies?
In early 2018, stock market turbulence in the US prompted foreign investors to begin divesting from emerging market equities. They began to stockpile cash into currencies and sovereign debt. However, investors didn’t choose just any currency. They bought three in particular: the US dollar, Japenese yen, and the Swiss franc. You may wonder what makes this mix of three countries unique?
The dollar, the yen, and the Swiss franc are considered safe-haven currencies. These countries are historically known for political stability and strong legal systems. They based this investment decision on a strategy which preserves wealth, leveraging the principle of stability despite other turbulent factors.
What is the VIX?
The VIX is the market volatility indicator. The index gauges how much the stock market is expected to fluctuate over the next 30 days. Portfolio managers often use the VIX score before making buying or selling decisions, especially during periods of uncertainty. The relationship is clear. When there is stock market volatility, you can also expect the VIX score to be higher. Remember, though, that we are in new territory where we don’t have decades of research and analysis about how social media politics can impact the market. As new variables arise, the reliability of older methods may lessen, and it’s crucial to maintain a discerning eye toward these factors. If you’re feeling uncertain, it’s a good idea to consult with a trusted financial advisor. Any wealth manager worth their salt will be keeping track of these shifting factors and can help you untangle the information you need to continue making informed financial decisions.
Brokerage account instructions
You do have some different options available to stabilize the value of your assets during stock market volatility. Whenever your broker set-up your account, you decided on a set of instructions on how they should handle your trades without needing to contact you. It may be advantageous to change the standing instructions for your broker from dividend reinvestment to receiving dividend income as cash. You can use it for purchasing cash equivalents or another equity that will lower the number of single stock equities in your investment portfolio. Or, if some of your stocks are doing well, it may make sense to take the loss to offset capital gains elsewhere.
What are some strategies for investors to protect their assets during market fluctuations?
There are a few key takeaways here:
Everyone’s risk tolerance is different. If you are a younger investor, then it’s okay to take on more risk and leave the recovery to the markets. However, when you are retirement age, it isn’t all that fun to see your stock portfolio lose 25% of its value. Make well-informed decisions about changes to your investment portfolio with the help of a wealth advisor.
Resist the temptation to liquidate. Deciding when to sell your stocks isn’t an easy decision and, barring catastrophic company news, should probably never be a knee jerk decision. If you have a robo-advisor, use all available resources to help guide you through the process of deciding whether to divest all or some of your stocks. If you feel anxious about your stock position losing value and you already have a wealth advisor, be sure to contact them right away. Sometimes the answer is yes, it’s time to sell, but not always.
This is not investment advice. These are just topics for you to think about or ask your wealth advisor. Remember that nothing beats decades of human experience, and no single article or “quick-fix” financial advice is going to provide you with the complete picture that an accomplished wealth manager can provide. A licensed financial advisor like those at SD Mayer can review your investments with you and make recommendations on how to rebalance your portfolio to stabilize the value your assets during periods of stock market volatility.
They have a team with decades of experience with how to manage assets under unstable market conditions. They can even help you to navigate through the political uncertainties that seem to be shocking us almost daily, and can help you feel as stable as possible about your financial decisions.
The mix of social media and politics is leading the market into unchartered territory. You can help anchor your portfolio with the help of an advisor with decades of experience, who can help you look at your assets holistically and plan for uncertainties that may arise. Contact us for more information or an initial consultation.