Volatility Is Back
The U.S. equity markets moved steadily higher since the March 2009 market lows, but the start of May reminds us all that price volatility still exists. The headline subjects changed from Bear Stearns, Lehman,
AIG and Citigroup to Greece, Spain, Portugal, and British Petroleum, but the results are the same. Uncertainty leads to price volatility. Yesterday marks the sixth triple digit move in the Dow Jones Industrial Average during the past seven trading session.
We can not change the world we live in, but we can take a long-term approach to investing that quiets much of the background noise. First and foremost, perform a thorough and truthful risk assessment to make sure your portfolio reflects a risk level within your comfort zone. Once at a horse race track there was a message in the day’s program that said, “Bet with your head and not over it”. This is great advice for the track, Las Vegas and even the stock market. Second point is to insure your portfolio has adequate diversification. Every day the market has winners and losers, and if your portfolio is properly diversified you will have the diversification necessary to smooth out the ride and weather the storms.
Personally, I’m always cautious about making a big bet on market direction. I would rather lean a bit bearish or a bit bullish, but not let my portfolio drift out of sight from its long-term investment objectives. Based on the fourteen month run in the market and the increased headline risk, leaning a bit bearish at this moment in time is prudent. The market will likely be choppy in the months ahead. Any pull back in equity prices will be a healthly long-term event. It’s not all doom and gloom though. Company earnings are improving, the economy has bottomed and the employment picture is beginning a long slow road back to normal. Do not throw in the towel on your investment plan, rather use the market turmoil to your advantage.