I have recently been asked by a few folks to write something on how to deal with the current market volatilty.
A great starting point is to understand why the volatility is here in the first place.
The current market swings are mainly driven by a lack of investor confidence in the markets which have emanated from:
1) The raising of the United States debt limit and the subsequent downgrading of the that country’s long term debt by Standard and Poors from its former AAA rating to AA+.
2) The Eurozone rescue package that some commentators feel will not go far enough to solve the problems and,
3) A general slowing of the developed markets economies.
I would like to emphasize that what is taking place right now is not a financial or liquidity crises like we experienced in late 2008.
Valuations are good, corporate earnings remain in the high teens, markets are functioning, governments are borrowing and corporations can borrow cheaply.
The latest pullback in crude oil prices to near US$85 will help as consumers and companies alike will find it more palatable to meet their energy needs.
The strong rally in bond yields will also assure that interest rates will remain low for the time being and continue to encourage borrowing and hopefully spending.
As sentiment shifts from growth slowdown to one of improving, albeit uneven growth, equities should resume their leadership position in time.
Economies are slowing, not falling.
This is essentially a crisis of confidence, and not a crisis of liquidity.
So how do you deal with all the volatility?
Firstly remember that these types of market upheavals are not new to the market place.
We have experienced them in the past and will likely experience them in the future.
Many investment managers benefit in these markets by taking advantage of lower valuations and buying stocks that have been sitting on the buy list but have been too expensive.
Your best weapon again market gyrations is a well diversified portfolio, making sure that your asset class and regional diversification matches your risk profile.
It may be difficult but you have to ignore your emotions and take a rational approach to investing.
Remember to always consult your financial advisor before taking any action on your investments.
Stuart Kirk is a Retirement Planning Specialist at Precision Wealth Management Inc. The opinions expressed are those of the author and may not necessarily reflect those of Precision Wealth Management Inc. For comments or questions Stuart can be reached at stuart@ghicks.com or
250-954-024