If you’ve been thinking that stock markets have been pretty quiet in 2017, you are right. Through the first seven months of the year, none of three major stock market indexes has fallen by more than 5 percent. And one gauge of market movement, the CBOE Volatility Index (VIX), which measures investors’ expectation of the ups and downs of the S&P 500 Index over the next month, recently dropped to its lowest level in 24 years.
Low VIX readings have tended to be equated with muted anxiety and high stock prices. Amid this environment, you might be wondering: What could go wrong? Remember the risks that persist. While their existence does not mean that long-term investors should change their game plans, risks are a reminder to guard against complacency and to approach investing with caution.
Here are four ways to manage and mitigate risk when the next round of higher market volatility appears – and make no mistake, it always does!
1. Create/revisit your game plan: Control your financial destiny by creating a financial game plan, which takes into account your risk tolerance and puts you on track to save enough money to reach your delineated goals. A CERTIFIED FINANCIAL PLANNER™ professional can help you create and stick to a plan.
2. Beware the savings trap: Rising asset values (stock and housing markets), can lead you to gloss over the basics. In 2006, I met with a then-client whose net worth had jumped because of a combination of a booming stock market and skyrocketing real estate prices. In his mind, he didn’t have to save more money, “because markets are doing the work for me!” You probably can guess what happened in the ensuing years.
3. Rebalance your diversified portfolio: There is no better time to rebalance your portfolio than when stock markets are calm and rising. Confirm that your allocation is what you had previously established (market movements may have shifted percentages) and if not, make adjustments. If possible, use the auto-rebalancing feature that many retirement plans and investment companies offer. Don’t forget to free up any cash you might need over the next year (i.e. tuition, home down payment or car purchase). Additionally, this could be an ideal time to replenish your emergency reserve fund, which is where you set aside enough money to cover six to 12 months of living expenses.
4. Stop trying to beat or time the market: Despite evidence that it’s nearly impossible to beat the market consistently over the long term, many investors still delude themselves into thinking they can do so. “They’re just not going to do it. It’s not going to happen,” notes Daniel Kahneman, Nobel Laureate in Economics and author of “Thinking, Fast and Slow.”
The same theory goes for those who may also be sitting atop some cash and waiting for the “right” time to put it to work. Who knows when that will be? Although you may invest at the seemingly “wrong” time, putting your money to work can bring you one step closer to reaching your goals.
One last note: Perhaps the most damnable outcome of spending time and energy on the fool’s errand of finding market-beating investments or trying to time your entry and exit from the market is that doing so can divert attention from the more important financial planning issues – everything from taxes, to retirement planning to education funding.
To stay the course as an investor through all kinds of markets, work with a CFP® professional to develop an investment and financial plan.