The recent volatility we have seen in the stock market can be unnerving for investors. It can often feel as if it is the precursor to a larger correction. It can also feel like something is wrong with the markets. Although we don’t know where the market is going from day to day, I can say with great confidence that there is nothing wrong with the markets. Everything is functioning normally.
Normal stock markets are volatile, and that is the reason that we build balanced portfolios.
Normal stock markets are volatile, and that is the reason that we build balanced portfolios. A balanced portfolio combines assets that react differently to stock market volatility, and that creates a smoother ride for investors. When Baker Boyer clients see that the market is down 5% or 10%, they can be confident that their portfolio is down less than 5% or 10%. This is the power of a balanced portfolio. We build investment portfolios for volatile markets for the same reason we have rain gutters on our houses. It doesn’t rain every day, but rain is normal, and we need to be prepared for it. Volatility in the stock market is normal, and we need to be prepared for it.
The truth is that a stock market with very little volatility is unusual. That was the case in 2017. The market in 2017 was one of the least volatile in recorded history. After a low volatility year like 2017, experiencing normal levels of volatility can feel jarring, when in reality it’s just a return to normal. The following cartoon is a wonderful illustration of this concept.
Volatility is the price we pay for the higher returns we receive from stocks. Every client has a different ability and willingness to tolerate stock market volatility.
Determining this ability and willingness to tolerate stock market volatility is the biggest decision that we make with clients. This decision, in combination with a client’s financial plan, allows us to construct investment portfolios tailored to each client’s risk tolerance. These portfolios will weather the occasional storm while achieving the inflation-beating returns that the stock market gives us over time.
If you are a Baker Boyer client, you are prepared for volatility.
If you are a Baker Boyer client, you are prepared for volatility. Your team of advisors is standing by to assist, even if all you need is a reminder that volatility is normal and you are prepared for it. If you have any questions, please don’t hesitate to reach out to your team at Baker Boyer.