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Were you keeping an anxious eye on your investment accounts leading up to last nights’ election? Are you relieved they seem to be climbing again?
In spite of the plunge in the futures market last night as it became apparent that Donald Trump would beat favored Hillary Clinton to become America’s 45th President, much of the market has now climbed back even higher than it was yesterday and are close to their all-time highs.
That’s important to note for several reasons.
As our friend Josh Brown put it , “it starts with understanding why you’re investing in the first place—a detailed financial plan with hard objectives and goals.” To do that, we work with our clients to focus on short-, medium- and long-term goals so that you can understand what your time frame is and what is needed to achieve it.
The short-term nature of much of the volatility that characterizes the markets is exactly why dollar-cost averaging is such a smart way to invest. If you stick to a plan of investing in new shares on a regular basis—no matter what the current cost is—you will be buying during dips as well as peaks.
The volatility we’re experiencing now—similar to the volatility we experienced earlier in the year during “ brexit “— are also great litmus tests to determine whether you have a properly diversified portfolio and whether or not it’s an accurate match for your risk tolerance.
If you know your true risk tolerance and have already planned effectively, you’ll have a balanced portfolio that contains the right balance of stocks and other less volatile instruments before volatility sets in.
With a fully diversified asset allocation strategy, there will be parts of your portfolio that go up, as well as other parts that go down, during times of stress. That way you’ll be comfortable sticking to your investment strategy and plan through peaks and dips. Not only that, but you will have purchased those less volatile instruments before pundits start shouting and everyone starts panic-purchasing, driving the costs up.
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Volatility is what makes the stock market the stock market.
The one thing that is certain about the markets is that there will always be volatility and uncertainty.
Even if we are currently experiencing a bit more than just normal market volatility, remember that the markets have historically rebounded extremely well after corrections (drops of at least 10%).