When Volatility Strikes
Written by Sandy Stuart
“Batten down the hatches.” “Please return to your seats and fasten your seat belts.” It looks like we are in for a choppy ride this quarter. It’s not because of anything scary, like a huge recession, depression or other economic event. No, the wave action will be mostly due to political turbulence. The politicians will be clashing over the budget, deficit spending, Obamacare and the like.
More wave action will be due to nervous-Nelly investors. You can tell when they are upset when the stock market goes down on GOOD news. These are folks who let their emotions direct their investment plays. What they think (IF they think at all) goes kind of like this: “The economy is strengthening; therefore the Fed will withdraw its stimulus measures. That scares me!” Like the Fed can control the whole economy. These investors would rather have a weak economy and Fed stimulus measures than a strong economy. Go figure! Regardless of whether it all makes economic sense, the end result is most likely to be an up-and-down stock market until the investing public gets their sea-legs back and regains some confidence in the economy.
If we suspect that the stock market is going to be choppy, should we care? Sure. But here at HSC Wealth Advisors we care but only in a perverse, contrarian way. You see, our fundamental approach to investing is to diversify the heck out of our investment portfolios, so that within each portfolio something is going up (or at least holding its value reasonably well) while something else is going down. Then as we rebalance, we sell some of what went up to buy some of what went down. We buy low and sell high. We can’t do that if everything is going in the same direction. So we need some turbulence.
The other reason we can be so brave is that we invest only in mutual funds and a smattering of exchange traded funds (ETF’s). So our clients are invested in literally hundreds, if not thousands, of individual companies. During an economic down turn some companies will go bust. Those who invest in individual securities have a right to worry if they make too big a bet on one company. And large size of the company does not mean safety. Think Enron and Worldcom. Our mutual funds and ETF’s will rise and fall with the markets. Those with good fund management will likely move up more than others. But even those with questionable management (which we try to avoid) will recover most of their value as the markets recover.
If the markets take a big dive, we will likely sell those funds that show a major loss and immediately buy funds of similar quality and composition, thus locking in tax losses. By doing so, we provide clients with subsequent months or even years of tax-free gains.
So we can stand in the bow of our investment vessel, plant our feet out wide and say, “BRING IT” (Although those new clients who have not yet been through a similar investment experience might want to take a sea-sick pill). And, as always, if you find you are losing sleep over your investments, please come and see us, and we will be happy to show you how this investment methodology works.