Volatility and Disciplined Planning in the 2022 Stock Market | Guest column

Volatility and Disciplined Planning in the 2022 Stock Market | Guest column

The stock market in January saw markedly increased volatility. In the first 14 trading days of January, the S&P500 was down around 12.5% ​​on an intraday basis. This could be called a “medium” correction and was likely overdue, given the strong performance of equity markets over the past two years.

One thing to keep in mind is that volatility is normal. This is an inherent characteristic of public financial markets. In fact, volatility is a necessary component to the higher returns generated by the stock market. History shows that investors who are willing to endure higher portfolio volatility can expect a higher rate of return.

Inevitably, when volatility rises as it has recently, client concerns may increase about their investments. And the concerns are appropriate.

For most of our clients, their savings and their ability to meet their financial goals are closely tied to the long-term performance of their investments. In this context, one of the most important things a good financial planner can do is give the client discipline not only for their investments, but also for other key elements of their financial plan such as budgeting. , goal setting, tax and estate planning, and cash flow management. All of these elements work together to support a financial journey that the client can feel confident in, including their investment portfolio.

As part of a financial plan, a disciplined approach to investing can go a long way in alleviating client anxieties or concerns during periods of market volatility.

There are several reasons for this. First, a disciplined investment strategy will include diversification across multiple asset classes, such as US equities, international equities, bonds, real estate, and commodities. Holding multiple asset classes helps mitigate portfolio volatility.

Second, proper asset allocation is an important discipline that refers to the percentage of assets in different asset classes. The asset allocation is determined by the needs of the client as set out in his financial plan and represents a strategic positioning of the assets which should not change according to the vagaries of the financial markets.

Third, having a disciplined approach to investing avoids having to try to “time” the market. Market timing, or trading in and out of the market based on assumptions about what the market can do, is probably the single biggest destroyer of long-term returns for both individual and professional investors and can seriously undermine a financial plan by otherwise solid.

Knowing that their investments are properly positioned in a disciplined manner can and should go a long way in allaying client fears during volatile times. Appropriate asset allocation will do the job of delivering the long-term returns in, ideally, the lowest risk posture necessary to achieve the plan’s objectives. By adopting this disciplined approach, clients do not have to worry about the short-term effects of market volatility and are better positioned to stay the course by delivering a more predictable long-term return on their assets with overall risk. weaker.

Robert Toomey, CFA/CFP, is vice president of research for SR Schill & Associates on Mercer Island.