During a previous article, we discussed volatility in the stock market and how many of the issues were tied to China and what the Federal Reserve was going to do with interest rates. Since that article, the Federal Reserve took center stage and its decision not to raise rates, which was what many investors and global markets wanted, has had a negative impact and the volatility has continued. What was supposed to calm the stock markets and the global markets has had the opposite effect.
There is a lesson in this: Even though the Federal Reserve acted the way many people wanted, the stock market’s volatility has continued. This may be an endorsement that other issues besides China and interest rates are affecting the stock market.
The Dow Jones Industrial Average and the S&P Index are negative year to date, but another event is about to happen in October which could shake up investors — investments statements get mailed out. Many would say they check their 401k/403b or personal investments daily, but there are a number of people who wait until they receive their statements in the mail and compare them to the last quarter to see how their investments have done. Unlike the last couple of years, those statements have shown increases, but this quarter may show a decline and for those who have taken a more aggressive approach, it could be dramatic. The calls that I have been receiving about the markets recently have a common theme. One person summed it up in her question, “Why does every stock go down when things are bad, but when things get better not all stocks go up”?
There is no one single answer to that question. The stock market has not had a correction since 2011 and this stock market is just responding to different conditions that may have not existed over the past few years.
As I have stated before, an investor needs to ask themselves a few questions. First, what type of investor am I? Are you a long-term or short-term investor? If you are a long-term investor, then tune out the short-term noise. While the market makes no guarantees, we have seen by staying invested for the long term the market has made investors money. Fifteen years ago when I was talking to clients and we were discussing the negative impact of the stock market on their portfolio, the S&P 500 ended up having a negative return for three years. However, investors who stayed invested in the market and were fully invested saw the markets turn around and the S&P 500 was positive the next five years (2003-2007). Once again, there are no guarantees with the stock market, but long-term planning, good investment advice from your financial advisor and appropriate investments will help investors in the long run.
We have three months left in the year and investors will have the time to review their investment holdings with their financial advisors to make sure they are in line with their financial needs. If you hold mutual funds, review your fund against similar funds, check the expense fees for each fund and check your portfolio for diversity among your holdings.
If you have fixed income or bond investments, the Federal Reserve has stated its going to start increasing interest rates in the future and this may help people who need to see their income stream increase. Once again, talk to your financial advisor about these opportunities.
So how do you handle the volatility of investing in today’s market? It doesn’t matter whether you are in a 401k/403b retirement plan or investing on your own; everyone needs to understand your financial needs and time horizon, your comfort level and lastly, own quality stocks and mutual funds. Check your mutual funds for duplication. You may own several mutual funds which could have many of the same top holdings and they could expose you to addition volatility in your portfolio or 401k/403b retirement plan.
Remember, all investments are not created equal. Always do your homework on your investments; it’s your money. To quote Ben Franklin, “An investment in knowledge always pays the best interest.”
Darek W. Hunt is a principal at Aurora Strategic Advisors. He can be reached at 910-734-2156.