Maintaining Investment Discipline in a Volatile Market

Thoughtware Alert Published: Apr 05, 2020
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Whether it was the tech bust of 2000, the Great Recession in 2008 or, most recently, the SARS-CoV-2 virus and the incidence of COVID-19 (COVID-19), all bear markets have one thing in common: They are very challenging to navigate. While each one presents its own unique challenges, there are some key best practices to making wise investment decisions during these times. Below are some important concepts to consider in the current volatile market environment.

Focus on Diversification – Global diversification helps reduce portfolio risk and improve return potential. Diversifying across the major asset classes, i.e., U.S. stocks, international stocks, bonds and alternative assets, spreads risk among investments that react differently to events affecting the market.

Rebalance Portfolio – The simplest investment advice is to “sell high and buy low,” but during a turbulent market, this can be challenging. Regardless of the direction of the market, rebalancing toward defined targets has proven effective in terms of both managing risk and improving portfolio return.

  • As drift from target allocation occurs, rebalancing involves selling “expensive assets” (those above target) and purchasing “cheap assets” (those under target).
  • Another means of rebalancing is to allocate extra cash to undervalued asset classes. In times of increased uncertainty, this can be done through dollar-cost averaging, perhaps over a three- to 12-month time period.

Avoid Emotional Decisions – Often, the biggest risk is not the volatile markets themselves but the emotional decisions investors make during these periods. Regardless of the planning and preparation that has been done, staying the course can be challenging amid bad news and volatility. Here are a few keys to reducing the effect of emotions on investment returns:

  • Refrain from looking at your statements – If a proper portfolio is in place and a rebalancing strategy intact, there is often nothing more that needs to be done.
  • Do not time the market – Often, investors are compelled to sell when the market seems at its worst, which is usually at or near a market low. One of the myths of investing is that if the investor sells out of the market, they can get back in when it reaches the bottom. But in reality, the best market days are usually adjacent to the worst, making “time in the market” a much more effective strategy than “timing the market.”
  • Identify your trusted advisors – During times of market uncertainty, count on your team of BKD Trusted Advisors™ to offer insights and be a source of accountability and guidance.

BKD COVID-19 Resource Center

This is an unprecedented time with many challenges and uncertainties. In response, BKD has created a COVID-19 Resource Center to help disseminate important information for our clients and friends as we evaluate ways to mitigate the inevitable financial effects. Through this resource center, we will keep you up to date with relevant news, changing guidelines, new regulations and anything else we believe you need to know.

Be sure to reach out to your BKD Trusted Advisor or use the Contact Us form below if you have questions or would like to discuss the financial planning strategies included in this article.

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