Prepare Your Portfolio for Market Uncertainty

 

Market turmoil is always frontpage news. When dramatic swings in performance get your emotions going, this is a clue: it’s time to take a step back.

 

Investing requires a longer time horizon. Different factors often cause market volatility: geopolitics, wars, pandemics, trade tensions, and inflation are just a few that can cause market upheaval. In each instance, however, the markets have bounced back over the course of time.

 

This is not to say that short-term trends don’t cause anxiety. They absolutely do. So, we’re offering actionable steps to strengthen your long-term plan for your portfolio. 

Step 1: Keep Your Budget Separate

It’s usually best practice to have at least six months’ worth of living expenses in an easily accessible, interest-bearing account. This is your emergency fund. It gives you peace of mind not just for market ups and downs, but for whatever else life may throw at you. Depending on your situation you may want an even larger emergency fund.

 

Additionally, to maximize the effectiveness of your portfolio, it needs to be decoupled from your day-to-day budget. If market uncertainty affects whether you feel you can afford your next vacation, or make you regret a recent vehicle purchase, you’re likely living above your means. After all, you generally want market drops to be unrealized losses.

 

By living within your budget, you’re enhancing your ability to invest effectively and allowing yourself to live your life with calmness and confidence.

Step 2: Know Your Risk Tolerance

Acting on emotions from market volatility is rarely, if ever, a sound investment philosophy. But that’s easier said than done.

 

Typically, your risk tolerance is calculated by the number of years you expect to invest. The younger you are, the more risk-tolerant you may want to be: You have time on your side and you’re usually looking to capture long-term upside. Whereas, if you’re close to retirement (or in retirement) you typically want to reduce your risk tolerance, since you’ll soon want to draw on your investments as part of your income.

 

However, this doesn’t account for you, personally. Your needs may be different. Also, anxiety is real during times of market uncertainty. If you know you’re uncomfortable with a high-risk strategy, there’s certainly value in being able to sleep at night—and you may need to adjust your risk tolerance accordingly.

 

This is where your Wealth Advisor and Portfolio Manager can really help. They can discuss your lower-risk options, strategize with you and present the tradeoffs of lower-risk versus higher-reward options.

 

Ideally, you should review your risk tolerance annually—and it should be independent of the current market situation.

Step 3: Diversify and Rebalance Regularly

A diversified portfolio helps you hedge against a drop in one area while gaining access to opportunities across a broader spectrum of investments. This type of portfolio is more likely to stay steady in the face of extreme volatility than a portfolio that’s skewed towards one sector.

 

The key is that you need to check in on your asset allocation regularly, since your diversified investments will likely progress at different rates. Unchecked, your portfolio may become unbalanced—and not at the target levels you intended. We recommend rebalancing on a regular schedule, sometimes as often as once a quarter. At 1834, for example, we rebalance our clients' portfolios on a regular schedule and on an ongoing basis.

 

An additional benefit of this is that it allows you to buy low on investments that are lagging, while selling high on investments that are surging—all while keeping your portfolio aligned to your target.

 

During major market movements, it may pay to check in. Has your portfolio become unbalanced? Are there opportunities to readjust on the fly?

Step 4: Trust Your Strategy

You and your Wealth Advisor have worked hard to develop a strategy that matches your current needs, while tracking toward your long-term goals. Market turbulence was part of the plan—it’s a known inevitability. Remember that you’ve planned for this.

 

Nevertheless, it may help to sit down with your Wealth Advisor. Maybe the turbulence is exposing a weakness in your strategy, or presenting an opportunity—or maybe you’re right on track and it’s just this moment that feels uncertain.

1834 is Here to Help

If you’re feeling uncertain, reach out. We’ve seen market turbulence before—and we’re happy to help you make sure that you’re investing, planning and focusing on your long-term goals.

 

Especially in the urgency of the moment, it’s easy to experience an emotional spiral. That’s why, at 1834, our Wealth Advisors are always available to talk.