Risk and Human NatureSubmitted by Fountain Financial Associates | Financial Advisors on May 25th, 2018
Posted on May 25, 2018 by Buck Beam
Volatility is one of the few certainties in financial markets. You never know when it’s coming, but as investors we eventually face it and when we do, it can change our views about risk. Risk isn’t only theoretical, risk happens.
We’ve written in the past about how we work with clients to decide on an appropriate level of risk, but much of that work is hypothetical. It’s one thing to say that you can handle a 10% drop in your account. However, it’s another thing entirely to experience that drop. The most recent volatility in the stock market offers a great opportunity to rethink the level of risk we are truly comfortable taking.
To put the most recent market volatility in perspective, the S&P 500 index reached the high of 2872 on January 26 and closed at the recent low of 2581 on February 8. This measure of U.S. stocks declined about 10.2% during that period. That makes it more than the 10% threshold to be called a “correction,” but less than the 14.2% decline that we observe in an average year. Historically, a 10% decline happens about once per year, a 15% decline about once every two years and a 20% decline about once every three and a half years.
Why is this decline any different? The truth is, it’s really not. The only thing that makes it feel different is that it is the most recent one. It’s been more than two years since the last 10% or greater correction and since then the market is higher by almost 30%. That doesn’t change the fact that when we experience this volatility, human nature kicks in along with the feelings of nervousness and worry.
This may be a perfect time to reflect on the amount of risk that you are comfortable taking. If this most recent market activity is to be expected about once a year, then how do you feel about that? No one enjoys temporarily declining values, but this should not cause you to lose sleep at night or to worry about your future. This volatility is fairly normal (and helpful over the long term). Does it bother you more than a normal move in the markets should? If the answer is yes, then it’s a good time for us to talk. Give us a call and let’s discuss the level of risk in your portfolio.
There is not one right answer and we are not suggesting changing portfolio mixtures frequently. However, getting the level of risk right is crucial to your long-term financial plan. Finding a level of risk that will help accomplish your goals and allow you to comfortably stick to your plan when markets exhibit volatility is perhaps one of our most important functions. As your financial advisors, we want to get this right. Your trust and confidence matter to us. They also matter a great deal to the long-term success of your financial plan.
* The opinions contained in this material are those of the author, and not a recommendation or solicitation to buy or sell investment products. This information is from sources believed to be reliable, but Cetera Advisor Networks LLC cannot guarantee or represent that it is accurate or complete.