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It’s a new year with a whole new set of circumstances.  A story that repeats itself on a regular basis every single year, usually with similar results.  We began 2022 with a peak in COVID cases, inflation reaching levels not seen in over 30 years, supply chain issues, the Federal Reserve preparing to begin a series of increases in interest rates as early as March, and now the Russian invasion of Ukraine.

Naturally, with all this going on, both the stock and bond market may be a little more volatile.  The broad stock market indices are at or near correction territory, which is typically considered a 10% price decline or more, while some stock indices are in a bear market, which is typically considered a 20% price decline or more.  Bond prices, which have been falling rather quickly over the past several weeks, have recently increased a little in the past couple of weeks due mostly to the shift of investments from stocks to bonds.

For those investors with a longer time horizon, market fluctuation creates buying opportunities.  It’s particularly beneficial for investors making contributions each pay period into their 401(k) plan as they can dollar cost average during down markets.  For investors nearing retirement or in the early years of retirement, large fluctuations in their investment portfolio can be a little unnerving.  If planned withdrawals are based on the market value of the portfolio on the day of retirement, a more than expected drop in the market may result in reducing the amount of the withdrawal.

It is critically important to not try to time the market or make emotional investment decisions based on the news of the day.  It is almost always a bad idea.  The problem with trying to time the market is when exactly do you get out and when exactly do you get back in?  Including professional money managers, no one is smart enough to consistently know when to buy and when to sell.  Making emotional decisions are even worse than market timing because it has no basis in proper market analysis.  You just get this feeling and you either go all in or get completely out.

Since no one can predict the future and a review of how different investments behave over long periods of time under different economic, investment, and political environments can help in the asset allocation decision process.  As the saying goes, history tends to repeat itself, with some variations, of course, and the longer the time-period you look at, the more times the market is positive, and in many cases, outperforms most other asset classes over the same time-period.  If you have a shorter time-period, then part or all your portfolio should be in a savings or money market account at the bank where you have no volatility, and your funds are insured.

The importance of diversification cannot be overstated either, especially for those who count on their portfolio to provide for a comfortable retirement.  Diversification can help to reduce the overall risk of your portfolio.  For example, by adding a 20-30% allocation to fixed-income securities in an all-stock portfolio can help reduce the overall volatility of the portfolio while not having a significant impact on the portfolio’s rate of return.  The same can be true for adding a 20-30% allocation to stocks in an all fixed-income portfolio.

To keep you on track with your investment decisions, it is critical to have a personal Investment Policy Statement (IPS) to help guide your long-term investment decisions.  It will help you establish an appropriate level of risk (volatility), identify your target rate of return, and create a disciplined process to rebalance your portfolio within an acceptable range of variance.  An IPS will keep you in the market when you should be in the market and provide enough flexibility to better protect your portfolio in more difficult markets.

Along with an IPS, a professional money manager who embraces a fiduciary standard can be a calming force to help you stay focused on your long-term financial goals during volatile times.  A professional who knows you and your unique situation can be a go to person to talk more logically about changes to your investment portfolio.