Market volatility shouldn’t keep you up at night. Easier said in theory than in practice, right? The week of October 8th was a quick reminder that volatility exists in the stock market. Always has and always will. While a 3% drop in the S&P 500 is outside of the daily norm, a 1% swing isn’t. “Equity Risk Premium” is defined as the excess return that investing in the stock market provides over a risk-free rate. This excess return compensates investors for taking on higher risk investing in equities. How people handle these swings (and subsequently their risk) is where the sleep comes in. Part of our job here at Lignum Wealth Management is to manage expectations and emotions for our clients. We don’t have a crystal ball when it comes to investing, nor does anyone for that matter! What we do have is over sixty years of combined investment experience which allows us to draw on past experiences and markets when it seems like the “sky is falling.” When figuring out your risk tolerance it is important to start off by asking a few questions:
• What is my timeframe for these assets? – planning for a home purchase goal in the next six months is uniquely different than planning for retirement in thirty years.
• When, not “if” the market has a pullback, how much of a loss am I willing to see on paper before I need to make a change?
• How long can I stomach a downturn in the market?
• How much upside potential am I willing to sacrifice for the stability of a “safer” investment?
• When the market pulls back would I add more to my investments, or do I even have the financial ability to do that?
These questions are just a starting point and there are obviously a lot more questions to be asked when figuring out risk tolerance, but this is a part of the process we take when planning with our clients. We generally find that when meeting a new client for the first time if these questions have never been asked, or more importantly answered, it leads to anxiety around the equity markets, and rightfully so! We could spend hours with clients looking at the “alpha” or “beta” or a portfolio or any other quotient under the moon, which is important for some clients, but those numbers don’t mean near enough if we hit a point where actual market results and our client’s expectations don’t align. I am certain that individuals who “hit their limit” and hopped out of the stock market in March of 2009 found it very difficult to get back in once the market started its rebound...if they got back in at all. All this to be said, it isn’t easy to see dips in the market and not be concerned, that is in our human nature. The reaction to these pullbacks is how long-term financial plans come to fruition. If these changes in the stock market have you losing sleep at night, it may be time to re-evaluate your risk tolerance and long-term planning goals. Sleep well!
Michael Krisko is a financial advisor located at 500 Edgewater Dr, Suite 511A, Wakefield, MA 01880. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at (781) 334-8100 or at [email protected].