The current volatility in the market is a topic of frequent discussion. After the slow but steady positive S&P 500 performance for the first half of the year there came a rush of activity and price adjustment in August. It could have been a result of recalibration of global growth because of lowered Chinese growth expectations or a recognition that valuation ratios continue to grow rather than company earnings. Either way, volatility is with us and here to stay, at least until the Federal Reserve decides to raise short-term interest rates. It’s normal for markets that have performed steadily positive for years to experience a correction, or 20% decline in the S&P 500 before resuming course. The reasons for these corrections seem clear in hindsight but there is always some cause that remains elusive when dealing in the present.
There are a number of steps an investor should take in preparation for the potential for continued market volatility. The first is to review your financial plan and remind yourself of the long-term nature of investing. Recognize that investing is a marathon and not a sprint. When the course goes up a hill you shouldn’t expect to maintain the same speed as when you’re running on flat ground. When you look back on years like this it will simply balance out and blend into your long term investment returns.
Second, you need to review your portfolio and make sure you are maintaining the proper diversification. If you’ve had some stocks that have performed really well over the past few years and some that have done poorly, it is a good time to rebalance and maintain your diversified investment posture.
Finally, you need to be able to prepare what you are going to hear from financial media with proper thinking. As Howard Marks writes in his latest “Memo to Oaktree Clients” investors need to resist first-level thinking, which are those straight line, easy-to-understand rationales for market movement or investing, and instead do the harder work of second-level thinking. Second-level thinking is realizing that the market is a complex system and pulling on one lever does not only effect one mechanism in the market but has several ramifications at differing degrees. It’s about asking the questions that really underpin value. Don’t be thinking that if x happens y is going to happen and therefore we need to do z now to avoid it. Unfortunately, investing isn’t that easy. Keep your financial goals in mind and the time it will take to achieve them, stay diversified, and be skeptical of “this is why x happened in the market today”, and you’ll make it through this time of volatility just fine.