How to Dampen Market Risk During Periods of Volatility

How to Dampen Market Risk During Periods of Volatility

Derek Gabrielsen, CRPC®, Wealth Advisor

Since the onset of the COVID-19 pandemic, markets have been extremely volatile, causing apprehension among investors. The CBOE Volatility Index (VIX), which measures perceived market risk, hit its highest level since the global financial crisis (66.05) on March 16, 2020. For reference, we started off 2020 at a level of 12.56.

While the pandemic has thrown a monkey wrench into everyone’s lives, and precipitated choppy markets, volatility has been here long before COVID-19 and will be here after.

Though we can never fully evade volatility, there are ways to minimize its potential negative impacts. Below are several strategies we suggest:

1. 1. Have a plan and stick with it: If you are approaching retirement, implementing a high-quality, cash flow-based financial plan is one of the best actions you can take. Among other variables, this will enable you to improve your retirement income without reliance on high returns. Tax mitigation and income planning, for example, are critical aspects of a financial plan beyond your portfolio. Your financial plan should also set reasonable return expectations throughout your retirement that can be used as a guide for your investment mix. Most successful retirees are not looking to hit home runs in their investments, just singles and doubles without striking out.

1. 1. Get invested and stay diversified: After a plan is put together, constructing a diversified portfolio is the next big step. While the makeup of investments is different for everyone, it is crucial for a successful financial roadmap. Simply put, a diversified portfolio uses a variety of non-correlated assets to mitigate market risk. It is also critical that your asset allocation matches your risk tolerance, or comfort level with risk. A key takeaway learned from COVID-19 is a lot of people are only comfortable with their risk profile when markets are going up. Being able to stomach downward market moves, however, is also important to ensure you stay the course.

1. Avoid market timing – you’ll eventually be wrong: One of the biggest pitfalls is cashing out during a market downturn or ahead of a potentially market-moving event, such as the U.S. presidential election. Trying to predict market movements is a mistake for a number of reasons.For one, all-or-nothing bets rarely pay off. Even if they do, and you avoid a significant market drop, when do you re-enter the market? The massive March sell-off we experienced due to COVID-19 was sharp and unprecedented; however, the upswing was equally as drastic and came without warning. Many investors who exited the market likely missed out on these gains and instead locked in losses. Furthermore, making big moves to cash deviates from the plan. Your portfolio should be built to withstand market downturns, not to bail out at the first sign of trouble.

These strategies, while effective, don’t mean financial planning is a “set it and forget it” type of deal. We are constantly working with clients to adjust course as needed to account for lifestyle changes and market conditions, all while keeping emotions in check.

If you have any questions about mitigating market risk, please feel free to call me at 216.800.9000.