I recently sat down with our CEO, Marty Miller, to interview him on his perspective on volatility. He has some interesting points to share that address current and historical volatility and investor behavior. I encourage you to take some time to join us in this conversation, and share it with someone who you know that has concerns over volatility.
You are going to hear the word strategy and read it often throughout this resource. What I would have you take away from this content is that as your advisors, we are already implementing this sophisticated approach in your portfolio, and we will continue to do so.
To begin this video series, Marty answers the questions:
- What is currently causing volatility in the market?
- What should investors do during times of volatility?
What is currently causing volatility in the market?
While there are a few things at play, the main contributor over the past two weeks has been the geopolitical crisis occurring in Ukraine. This conflict is evolving with each passing day, and the market is responding as such. We expect continued volatility in the near term as this crisis unfolds.
We started out this year with several dynamics which have pressured the market; slowing rate of economic growth, a tightening monetary policy, inflation running hot from supply constraints and rising interest rates. We are coming off the biggest government financial intervention in the history of our country, where over the past two years we have seen the government stimulate the economy with trillions of dollars, and drop interest rates close to zero. What we are seeing now is the Fed easing back into a rising interest rate environment, and as the cadence of rate hikes becomes more clear, we should anticipate to see further volatility around that.
What should investors do during times of volatility?
Investors often take heed to general advice such as be patient and stay the course, which are sound starting points, but there’s much more involved if an investor wants to optimize before and during volatility, and it requires strategy and action.
As I mentioned in the beginning, MA Private Wealth takes a very proactive approach to actively managing investor portfolios. We expect volatility to occur every year for various reasons, and as such we position portfolios to take advantage of market upside and buffer against downside. We also evaluate portfolios at least once per quarter, and we re-optimize when appropriate.
In addition to this, we often encourage clients who have excess cash sitting on the sidelines to take advantage of the opportunity of a market pullback or correction. While we value patience and a long-term outlook as part of disciplined investing, we take quite a proactive approach in our management style.
Part 2Expanding on his advice to get "right twice," Marty answers:
- What role does emotion play in investing?
- What role does strategy play in investing?
What role does emotion play in investing?
We are all familiar with the fight, flight or freeze response as natural human responses to safety threats. Our finances are a form of personal security, and when people feel that their financial livelihood may be threatened, we have seen our fair share of flight (sell off) or freeze (no action).
If we look back at February 2020 when the news of the pandemic became universally known, we all witnessed a huge flight out of the market to the rate of a <30% drop. This was an emotional response to uncertainty - this was not a strategic move. Over the course of the next 12 months, the US stock market rebounded over 70%.
Within the last 20 years, 24 of the 25 worst trading days were within one month of the 25 best trading days, which means if you sold your portfolio as a reaction during a market correction and sheltered it in cash, you would have missed the opportunity for your investments to recover - oftentimes less than one month later.
Our role as your financial advisors is to ensure you are making decisions from a place of intellect and discipline, and we will continue to equip you with both.
What role does strategy play in investing?
Strategy is absolutely critical and should be both constantly evaluated and in motion. Amid volatility, we advocate for strategies that are well designed from a diversification standpoint, yet resilient enough to meet long-term goals.
The set it and forget it model is a good example of a poorly designed investment approach, and I will pick on 401(k)s for just a moment, even though I think they are a great savings vehicle. When one sets up a 401(k), they have a basket of finite investment options to choose from. When starting out with the plan, one selects a handful of mutual funds, then selects their contribution level. Going forward, contributions are automatically invested into that original handful of mutual funds on a regular basis. What we see more often than not, is that years can go by before this individual reviews their 401(k) to see what new investment options the plan is offering, let alone re-optimize their 401(k) plan. This can lead to missed growth opportunities or overexposure to risk.
Designing a robust portfolio with high intellect and re-optimizing it often are fundamental strategies that MA Private Wealth implements.
In this final video, Marty answers:
- What are the main components of a sophisticated strategy?
What are the main components of a sophisticated strategy?
At MA Private Wealth, we believe there are three fundamental components to a sophisticated investment strategy.
The first is quality intellect. We leverage institutional grade investment analysis and strategy when we design our portfolios. It is our standpoint that one advisor or even a handful of advisors cannot possess enough knowledge across both domestic and global markets to properly design a portfolio with all factors in mind.
The second component is diversification. We advocate for broad diversification amongst several asset classes with opportunity, exposure and risk in mind.
The third component is cadence and re-optimization. We review portfolios on an average of every 90 days, and make adjustments on an ad-hoc basis as necessary. This momentum allows us to make tactical changes for both performance and enhanced risk tracking.
As you have read, much of what should be considered in relation to volatility is taking the right action with an intelligent plan in place. We will continue to provide you with a well managed investment approach, and guide you through various market cycles. If you know someone who is curious or concerned about volatility, please share this resource with them.
Are you considering partnering with a wealth advisor or would you like to discuss volatility as it relates to your investment portfolio? Let's talk.