Market Volatility: Your Friend
Market volatility can be frightening, but also useful. Gyrating stocks are a good reminder to look at your portfolio with a critical eye. The key is to curb your emotions and not panic.
For the first couple of months of 2013, we continued to enjoy a nice advance in equity prices. In fact, it is over 500 days without a correction – defined as a 10% drop – in the Standard & Poor’s 500 stock index, according to Steven Russolillo of the Wall Street Journal.
With this type of market action, traders relax and forget what a down market looks like. This all changed last week, on Monday Feb. 25, when the Dow Jones Industrial Average lost 216 points.
As a result, the Chicago Board Options Exchange Market Volatility Index, often called the “fear index” or the VIX, shot up 35%. It uses options contracts that measure investors’ expectations. Over the past 23 years, there were only 19 instances where volatility spiked in a single day over 30%.
This massive amount of volatility can scare some people. Such huge movements can make you overthink your process and question your investments.
That isn’t a bad thing, though: Sometimes, it’s good to get a little shake to wake you up and re-examine what’s in your portfolio. The investment team at my firm constantly evaluates the risk level in our clients’ portfolios and makes sure their holdings are positioned appropriately.
What’s important is to remember that single-day events and even multi-day events of market weakness and volatility upticks are normal, healthy and, to some extent, expected. The streetlights still come on at dusk, the coffee still brews in the morning, and the dry cleaning still awaits pickup. My point here is that life goes on, no matter what the market does.
I’ve mentioned in previous articles that we must look at the bigger picture. And days like last Monday make this point with a lot of fanfare. We all remember the waterfall-like stock slide during the 2008 financial crisis. Many investors lost their life savings. The pain became too much to handle. The Dow Jones seemed headed for zero. But that didn’t happen. In fact, while not taking into account dividends, the Dow rose over 100% since its bottom in 2009.
As investors, we must get up, dust ourselves off, and realize that, while a light might not always be visible at the end of the tunnel, that doesn’t mean it’s not there. So while we still are adding to the number of days since we had a correction of 10% or more, we should check ourselves and make sure we aren’t too complacent. When we become overly content, things change and the market hiccups.
Follow AdviceIQ on Twitter at @adviceiq.
Joseph “Big Joe” Clark, CFP, is the managing partner of the Financial Enhancement Group LLC, an SEC Registered Investment Advisory firm in Indiana. He teaches financial planning at Purdue University and is the host of Consider This with Big Joe Clark, found on WQME and iTunes. He is a Registered Principal offering Securities and Registered Investment Advisory Services through World Equity Group, Inc, member FINRA/SIPC. Big Joe can be reached at firstname.lastname@example.org, or (765) 640-1524. Follow him on Twitter at @Big Joe_Clark and on Facebook at http://www.facebook.com/FinancialEnhancementGroup.
Securities offered through and by World Equity Group Inc. Member FINRA/SIPC. Advisory services can be offered by the Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.
AdviceIQ delivers quality personal finance articles by both financial advisors and AdviceIQ editors. It ranks advisors in your area by specialty. For instance, the rankings this week measure the number of clients whose income is between $250,000 and $500,000 with that advisor. AdviceIQ also vets ranked advisors so only those with pristine regulatory histories can participate. AdviceIQ was launched Jan. 9, 2012, by veteran Wall Street executives, editors and technologists. Right now, investors may see many advisor rankings, although in some areas only a few are ranked. Check back often as thousands of advisors are undergoing AdviceIQ screening. New advisors appear in rankings daily.