MAKING CENTS: Knowledge is power in stormy market conditions

“Everyone wants happiness and no one wants pain. But you can’t have a rainbow without a little rain.” 

– Anonymous

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Volatility has the ability to catch people off-guard.

As information becomes more widely available, it’s more and more about how we utilize that information that counts.

 Investors have the ability to benefit from volatility, and not fear a bit of turbulence.

We have all heard the old saying “buy low, sell high,” and it is volatility that helps expose new opportunities to buy quality investments at a discount.

October was an extremely volatile month with many negative days in the stock market.

It was to be expected given that inflation is increasing, and the interest rate rhetoric leading into the uncertainty of the U.S. midterm elections.

While lower volatility in a rising market may be appreciated by investors, it can lead to problems when the prices start to fluctuate at more normal levels.

It’s important to understand how your investment portfolio is positioned, what the expected returns are, and what sort of fluctuations in value you could experience. 

Your financial advisor should be able to articulate what type of risk management strategy they incorporate in your portfolio and be able to explain it to you in language you can understand.

How will they protect you in periods of heightened volatility?

Was this current market pullback normal? Actually, it was.

What makes it feel like it was not is that 2017 was historically one of the least volatile years we’ve seen in about 50 years, and as volatility has started to return, we are reminded that markets don’t just move straight up or down. 

Corrections are normal, natural and indeed necessary. They are required to both remind market participants of the inherent risks of investing in equities, and to reset valuations and expectations.

When analyzing volatility, it is important to determine the larger trend within the shorter-term swings.

Is the momentum of the market shifting? Is the market downturn leading to something worse, like a recession?

 In my opinion, the October stock market correction is done and leading indicators are showing us the economy is constructive and growing at a good pace. 

Unemployment numbers in both Canada and the U.S. are historically low and rising interest rates signal that the economy is fundamentally strong. This is all good news!

How can investors reduce volatility in their portfolio? Diversification and active-management.

By monitoring and adjusting your stock market exposure, as well as owning investments that don’t move in tandem with each other, you can provide a smoothing effect to your overall returns to make it easier to sleep at night.

It will help knowing your portfolio won’t experience wild daily swings if managed properly. 

Cashing in your portfolio also acts as a cushion when markets decline, but also allows you to capture opportunities when they arise, from negative volatility.

It is important to focus on medium- and long-term periods, as short-term volatility is an inevitable part of investing.

That being said, there are things your financial advisor should be doing to protect you when markets act up. 

It’s also an excellent opportunity to review your financial plan to ensure you remain on track, and check that your portfolio is aligned with your long-term goals.

 

Lori Pinkowski is a senior portfolio manager and senior vice president, private client group at Raymond James Ltd. This is for informational purposes only and does not necessarily reflect the opinions of Raymond James. Lori can answer any questions at pinkowski@raymondjames.ca. You can also listen to her every Wednesday morning on CKNW at 8:40 a.m.

 

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