When I heard the news about the United Kingdom’s decision to leave the European Union (E.U.), my first thought was of the uncertainty that’s in store for the global economy, the political arena, and investors. Investors across the globe are eager to know how their portfolio will be impacted by the U.K.’s pending departure.
While the U.K. figures out its relationship with its E.U. partners, some degree of uncertainty is likely to continue. But while the complex conversations and negotiations among global political and economic officials ensue, investors are left to wonder: What does this mean for my portfolio? What should I do?
How I approach client conversations during market turmoil
When clients call me, concerned about the 500-point drop in Dow futures that greeted them on Friday morning, I have a focused plan for our discussion.
I start by listening to their concerns so I can understand their perspective. Market volatility doesn’t surprise me, but I understand how upsetting it can be because I’m an investor too. Just like my clients, I work hard to save money, and it’s unsettling to see my balance fall by 1%, 2%, or 3% in a day, or possibly even 5%–10% or more in a week. But this level of market movement is expected. In fact, the S&P 500 has been in either a correction or bear market 40% of the time since 1928, but in spite of this, the average annual return for the index is 10% over this same period (see this article for more data on corrections and bear markets).
Trust your asset allocation
Next, I turn the conversation back to my clients’ long-term goals. For example, what’s happening in the United Kingdom hasn’t changed the fact that clients may want to retire in ten years, travel, and leave a legacy to their children. And it’s these goals, which are very personal, that informed their target asset allocation—the diverse mix of stocks, bonds, and short-term reserves that was carefully selected to lessen the impact of market volatility in global situations like this.
When I work with a client to build a portfolio, I simulate various market conditions—based on current and historical data—for the portfolio to forecast how likely it is to meet the client’s specific goals. During times of market volatility, my clients and I can revisit this simulation for reassurance that their portfolio is prepared to weather negative markets. (Most client portfolios have an allocation to bonds, which can buffer stock volatility, to provide stability in times of market stress. And, as this article highlights, high-quality bonds are—and have been—doing their job.)
Regardless of short-term volatility, I encourage clients to focus on the long-term expected returns for their portfolio based on the asset allocation we’ve agreed upon. (If you aren’t sure how well your asset allocation aligns with your goals, take our Investor Questionnaire. If you need more help, consider partnering with an advisor.)
Finally, I respond to the question “Should I change my international holdings?” with a committed “No.” Making a change to your portfolio in response to world news would be considered market timing, which is usually a losing strategy. We can’t predict how low the market will go in times of market turmoil, nor can we pinpoint precisely when (or to what extent) it will rebound.
It’s important to maintain a well-diversified portfolio throughout your investment time horizon. Attempting to adjust your portfolio in response to the latest news headlines is a game you probably won’t win—it may not only hinder your ability to meet your goals over the long term but also may keep you from achieving your desired results completely.
Focus on the long term
We can’t predict the markets, and we surely can’t control them. But we can control how we react—and have a plan. As an advisor, I help my clients stay focused on their long-term goals. And as an investor, I stay the course.
Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Diversification does not ensure a profit or protect against a loss. All investing is subject to risk, including the possible loss of the money you invest.
Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.