How to navigate a volatile stock market
By Mike Brady, Michael Brady & Co. Wealth Management
As I write this, the S&P 500 is in correction territory, having closed 10.2 percent below its high reached at the end of September.
It looks like volatility is back in the market and this is a good time to reemphasize an important part of long-term investing: You need to keep calm and carry on.
If you are a buyer of stocks, you are adding money every two weeks into your company retirement plan. This is a great opportunity for you to acquire more shares while they are on sale. For the same amount of money you invested last month, you can buy more shares because they are on sale for 10 percent off.
If you are a seller of stocks, this is the time where you live off of your non-stock investments or rebalance your portfolio and sell some non-stock investments (bonds and cash) and buy more stocks on sale.
Declines of at least 10 percent in the stock market happen quite regularly, and declines of 20 percent have happened 22 times since 1929—an average of every four years. The last decline in excess of 20 percent was in 2008-09. That’s 10 years ago. We should all be prepared to ride out the next major market decline.
Why on earth would we invest in something that goes down more than 20 percent in value on a regular basis?
Because that something has appreciated over 7 percent per year over the last 89 years, and has paid dividends (income) averaging another 4.8 percent. That’s a combined total return of about 11.8 percent per year. Now, obviously, that’s an average return and in many years the market loses value. So, how do we ride out these regularly occurring market swings?
The best way is to have two different investments: Stocks and bonds. Think of them as being on the ends of a teeter-totter. When the stock end is down, the bond end is up. When the stock end is up the bond end is down. Your job is to keep the ends equal. When stocks are up, move some of those funds to the bond side. When stocks are down, move some funds from the bond side. This forces you to sell stocks when they are high and buy stocks when they are low.
If you don’t feel comfortable doing this yourself, give us a call and we’ll set you up to take advantage of whatever comes our way in the market.
Michael Brady is a fee-only, full-time fiduciary and certified financial planner. To set up an appointment, call 440-235-2100, email Mike@MichaelBradyCo.com, or visit MichaelBradyCo.com.