Three timeless strategies for today’s market volatility

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Though the stock market has historically trended higher over the long term, these days the markets have been more sensitive to economic and political news. Stock prices seem to swing with each new announcement about the U.S.-China trade war, the uncertainty surrounding Brexit, U.S. Federal Reserve policy and the apparent global economic slowdown. Periods of strength have been followed by sharp downturns — and vice versa — and it’s hard to know what to expect going forward.

Faced with so much uncertainty, many people are tempted to cut back on their exposure to equities. But while the idea of waiting until things settle down may seem like a sensible plan, waiting may mean missed opportunities.

Some equity investors may have lost money in an attempt to avoid losses

In 2018, the equity markets were choppier than they had been in some time. The average investor reacted by selling equities and moving to cash equivalents or fixed-income securities, which often left them out of equities during the periods of recovery.*

According to Dalbar, Inc., “The average investor was a net withdrawer of funds in 2018 but poor timing caused a loss of 9.42% on the year compared to an S&P 500 Index that retreated only 4.38%.”* In 2018, the average investor lagged the S&P 500 in months when the market was up, as well as when it was down.

Considerations for a volatile market

Investors who moved out of equities during a downturn may have turned paper losses into permanent ones. The following are helpful considerations during periods of market volatility.

 

  1. A focus on goals
  2. Comprehensive financial planning
  3. Diversification of portfolios

 

Let’s take a closer look at each consideration.

1. A focus on goals

When the television ticker and internet headlines feel overwhelming to some investors, goals should be reassessed. Is the goal college funding, retirement, estate conservation or charitable gifts?

These goals are likely to be years in the future, which means that today’s market performance may not be an immediate concern. After all, while the markets can swing wildly in the short term, returns have historically been positive over longer time horizons.

2. Comprehensive financial planning

A long-term financial plan can be helpful during times of market volatility. Existing plans can benefit from an annual review to ensure that goals and personal situation haven’t changed. Taking a longer-term view may provide a reminder about progress toward goals, despite short-term market swings.

Investors who lack a financial plan may take a do-it-yourself approach to create one, using online tools, or can request the help of a financial advisor. A thorough plan will start by taking stock of current status and desired goals. Questions to consider may include:

 

  • How many years do you have until retirement?
  • How much will you need to live on?
  • How much do you have saved now?
  • How much can you invest between now and your planned retirement date?

 

The act of planning is an excellent counterweight to negative financial news. Investors who stick to a plan are better off than those who try to time the markets. That’s because market timers have to be right twice — they have to know when to get out, and know when to get back in.

In fact, even during a bear market, the market has plenty of days when it makes gains. Those who are sitting on the sidelines may cut themselves off from the upside as well as the downside.

Source: AllocateSmartly.com, “Reminder: Big Up Days Occur With More Frequency in Bear Markets,” 1/4/19. Calculation: [(14.48% / 34.29%) / (85.52% / 65.71%)].

3. Diversification of portfolios

Some cynics note that it takes a market decline to tell you how well diversified you are. A portfolio that is concentrated in one or two segments of the market is much more vulnerable to volatility than one which includes multiple asset classes, styles, sectors and geographic regions.

Choppy markets present the opportunity for a portfolio check-up. If everything is getting hit at once, it may indicate that an asset mix is too heavily weighted to riskier areas of the markets. A sensible asset allocation strategy typically involves exposure to growth investments, principal protection vehicles and cash equivalents, weighted according to risk tolerance.

Once an appropriate asset allocation based on circumstances and risk tolerance has been created, it can benefit from regular rebalancing to maintain those weightings. This adjustment can help compensate for periods in which a particular segment of the market may outperform or underperform.

Many investors prefer to invest in a diversified mix of equities and fixed-income securities, which allows them to pursue growth while seeking income and principal preservation. BNY Mellon Balanced Opportunity Fund offers professionally managed exposure to both stocks and bonds. Learn more about the fund, including its risks and expenses.

The fund seeks high total return through a combination of capital appreciation and current income. Typically, 25% to 50% of the fund’s assets will be allocated to fixed-income securities.

Click for more about BNY Mellon Balanced Opportunity Fund

We’re here to help

During times of market volatility, we can offer the perspective, insights and guidance you need. Call us at 1-800-443-9794 from 9 am to 5 pm, Monday through Friday, or visit bnymellonim.com/us. You don’t have to navigate rocky markets on your own.

Investors should consider the investment objectives, risks, charges, and expenses of any mutual fund carefully before investing. Download a prospectus, or a summary prospectus, if available, that contains this and other information about the fund, and read it carefully before investing.

All investments involve some level of risk, including the possible loss of principal. Certain investments have specific or unique risks. Asset allocation and diversification cannot ensure a profit or protect against loss in declining markets.

No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.

Views expressed are those of the advisor stated and do not reflect views of other managers or the firm overall. Views are current as of the date of this publication and subject to change.

BNY Mellon Investment Management is one of the world’s leading investment management organizations and one of the top U.S. wealth managers, encompassing BNY Mellon’s affiliated investment management firms, wealth management organization and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the corporation as a whole or its various subsidiaries generally.

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