Market Volatility: Strategies for responding to a volatile market

Stock market volatility is not uncommon nor is it a new phenomenon. The volatility that we’ve seen so far in 2022 is higher than normal, but certainly not unprecedented.

Market volatility can be measured by finding the average return for a given stock market index over a certain period of time and then calculating the standard deviation of the annual returns over time. This way an investor can see how severe a given level of volatility in a particular market benchmark, like the S&P 500, might be.

Another often used volatility indicator is the VIX, the Chicago Board Options Exchange’s Volatility Index. This is often referred to as the “fear index.” On this basis the current level of the VIX in the mid-20s is not historically high. By contrast the indicator stood at 66 in March of 2022 right before the low point in the markets at the start of the pandemic.

Strategies for responding to a volatile market

There are many factors that investors face that are beyond their control. Market volatility is one of those factors. Long-term investors must accept the fact that the markets will experience periods of volatility from time-to-time over the long run.

Three important strategies for dealing with market volatility include:

  • Harvest tax losses in taxable accounts to offset gains or income elsewhere. However, be sure that the securities sold are done so only if the sales make overall investing sense. Tax-loss harvesting and portfolio rebalancing can mesh nicely.
  • Continue to invest. Whether you are contributing to a 401(k) plan or make other regular investments continue with this plan. Investing when the markets are low can pay off over time for investors. This is the exact opposite of timing the market.
  • Investors who are retired should maintain a cash reserve to ensure they have sufficient cash to meet retirement income needs, including their required minimum distributions if applicable.

Staying the course is also a viable strategy for volatile markets. Data from First Trust shows that intra-year declines can be balanced by decent positive returns in the same calendar year. A recent case-in-point is 2020. We saw the S&P 500 decline by as much as 34% during the year, only to post a full calendar year return of 16%.

Stocks vs. Bonds

Many experts think stock market volatility will persist. We’ve seen signs of market leadership shifting from growth stocks, including tech, to more value oriented stocks. In the case of bonds, returns have been impacted by higher interest rates resulting from the Fed’s efforts to fight inflation.

In both cases investors need to revisit their long-term investing plan to see if any adjustments are needed. With stocks, perhaps backing off their allocation to growth in favor of stocks or funds in the value or blend categories. Looking at industries and sectors that might benefit from these changing trends can make sense for some minor tweaking of their portfolio.

In the near term, bond investors may see more pain in terms of declining valuation of individual bonds and bond funds. Over time, they may see price appreciation as rates decline. For bonds purchased now, this can result in both price gains and higher yields.

Time to revisit your portfolio

Mostly investors should refrain from wholesale adjustments to their portfolios and stick with their long-term investing strategy. That said, this is a good time to revisit your portfolio. Are there some tweaks to your equity and fixed income holdings that might be appropriate in line with your goals, investing time horizon and risk tolerance? Are we in the midst of some longer-term market leadership adjustments and should your portfolio reflect these changes?

As we approach year-end, look at opportunities for tax-loss harvesting in taxable accounts as you make any adjustments and in the course of normal rebalancing.

Be sure to reach out to your Wedbush financial advisor to review your portfolio and to help you determine what, if any adjustments are appropriate for you. A third-party’s unemotional professional opinion can be a real asset for investors in these times of market volatility.

 

Disclosure

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.

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