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Is Market Volatility Driving You Crazy?

It is always better to prepare for a storm than to wing it when it hits.
Anticipating volatility is the best way to protect your goals from market swings.
Market volatility is no fun. It comes when you least expect it, lingers on longer than you can tolerate it and causes wild swings in your portfolio that make your heart race like you just ran a half-marathon. You hear from people who “sold everything” and are now sitting back and enjoying their smart move – why didn’t you think about it? Your advisor tells you that “volatility is normal”, that you should “stay the course” or “buy more while prices are low”, but this advice is no consolation when you are worried about your upcoming college tuition bill or retirement in 5 years. So should you be worried? Of course you should be worried! Should you sell everything right away? Nobody without a crystal ball knows the right answer to that question. I follow a few practical guidelines to help my clients navigate the stock market’s inevitable ups and downs while they accumulate enough money to grow their nest egg.

I am an avid tennis player who spends a lot of time learning the game. Tennis is a notoriously mental game and if you are not mentally tough you won’t win regardless of how pretty your strokes are. One lesson I learned recently about mental toughness is: nobody does well under pressure. Best athletes do not “deal with pressure”, they learn to not feel pressure. What does this have to do with investments? If you create your portfolio in a way that factors in pressure, you will not feel too much pressure when the markets go wild. How?

According to the National Bureau of Economic Research, the average market cycle has lasted 56 months between 1854 and 2009, with 39 months of expansion and 17 months of contractions, give or take 4-5 years in total. Structuring your portfolio around the expectation of these cycles will help mitigate the risk of losing money at the wrong time. We accomplish this by allocating assets according to the timing of the need for the money.

We invest to take care of “big ticket” needs in our lives – college, house, wedding, travel, retirement, etc. We mostly know when we will need the money and how much. We also know with some certainty our living expenses for the next few years (I help all my clients create a detailed budget and keep a close eye on their expenses).

My client portfolios follow these guidelines:

• Allocate 3-4 years of expenses into a cash account that will earn some interest and not lose its value
• Allocate the next 3-4 years worth of needs into a high-quality fixed income portfolio that will be less volatile than stocks
• Invest the rest of the money in a diversified stock portfolio at a reasonable cost
• Review the portfolios and the market conditions annually and move money (like a slider) for the next 3-4 years into cash, fixed income and equity portions.

As a result, my clients are able to:

• Have enough money set aside for immediate and near-term needs
• Build cushion for unexpected financial needs from the fixed income portion of the portfolio
• Take advantage of the growth in the equity markets and earn extra returns with more confidence


Market volatility will happen regularly as the economic cycles ebbs and flow in any political regime. Countering the ups and downs with thoughtfulness, determination and consistency will help you win every time.

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