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How to React to the Recent Stock Market Volatility

by Corey Sunstrom, CFP®

2017 was nice wasn’t it?  Nine years after the financial crisis, markets continue to post positive years and the last one was no exception.  What made 2017 so unusual wasn’t the increase in market value however, it was the lack of volatility (up and down movement) of stocks.  It’s easy to grow complacent in markets like these, where fear subsides and gives way to confidence and optimism.  Surely there is a lot to be optimistic about: the US economy is highlighted by positive indicators, tax reform seems to be encouraging stimulus by large companies, and real estate prices continue to climb.  

If we had forgotten how volatility feels, this past week was a stark reminder that it didn’t disappear forever.  Markets pulled back over the week, inciting frenzied talk show host debates and warning-label headlines.  In light of this, it’s a great time to take a step back and evaluate where we are and what we need going into 2018.

Ignore the Headlines (Stop watching CNBC all day)

Keeping up with the beat makes us feel informed.  There is certainly no lack of information or opinion thrust in front of us everyday, leaving the average person the task of sorting through the stacks of fluff and fact.  We have to understand that in today’s world, it’s very hard to distinguish and understand motive behind every headline.  Had you watched the financial news last week (or any news for that matter), you might assume the world was falling apart.  Here are some headlines I read:

Dow Plunges 600 Points As Interest Rates Run Higher; Alphabet, Apple Slammed

S&P 500, Dow Suffer Biggest Weekly Decline in More Than 2 Years

Stocks Keep Faltering as Volatility Keeps Rising

While it’s important to be informed, don’t get wrapped up in the media hype surrounding the market.  Very rarely does breaking news dictate the long-term success of a portfolio; but it might increase your blood pressure.  There is a saying we have as advisors: “If you make decisions based on the headlines, you’ll soon be delivering the paper.”

Zoom Out and Put Things in Perspective

With the potential for volatile markets ahead of us, we need to think about 2018 in context.  We are coming off one of the more uneventful years in the market (that I can remember) which is amazing in itself.  However, 2017 wasn’t a rule - it was more of an exception when you look back over history.  Volatility may feel different today, but that’s because we haven’t experienced it in quite awhile and happen to be much more sensitive to it for that very reason.  Volatility is normal, and happens regularly as individual and institutional investors adjust their expectations of the market and their investing habits.  This year is no different.  While we couldn’t tell you whether the market will be positive or negative by the time we reach December 31st, we’d be willing to guess that it might not be as smooth of a ride as 2017...and that’s okay.  

Revisit Your Long-Term Investment Plan

The importance of understanding your long-term financial goals cannot be minimized in times like these.  One week is a blip on the radar compared to the 20-to-30 year horizons we discuss in relation to investment plans.  It is also vital to fully understand the type of risk you are taking with your retirement savings.  The markets are going to move up and down with regularity, and there will be greater downside at some point in the future.  Our job as advisors is to make sure we understand your tolerance for risk and put together a plan accordingly, so when the bad times are upon us, we already have clear expectations of how it might affect our portfolios.

It’s been a smooth upward ride for the last 14 months, and it’s about time we saw some resistance.  Accept the ebb and flow, and resetting of expectations.  This is normal.