A visit to your doctor to get a stress test can be stressful. Running on a treadmill while hooked to an EKG monitor is designed to see how much stress your heart can take. The best-case scenario is that your doctor tells you you’re fine and no other tests are needed. The worst-case scenario is you’re rushed to a hospital to get a quadruple bypass.
It’s not possible for your doctor to look at you and tell you that you’re fine. She needs to ask you a series of questions, run a few tests, review your vital signs, and then put you on the treadmill. After all the tests are done she can give you the results. Once your baseline is established, she can reference it for future visits.
This past week the stock market reacted negatively to news of a trade war, data breach and rate hike. The Dow Jones fell 5.6% because of these unsettling stories and it has now moved into negative territory for the year.
A Certified Financial Planner practitioner, like your doctor, can’t look at you to determine your financial fitness. He must review your financial vital signs to diagnose your situation. A financial plan will assist him with the analysis. In addition, a stress test on your portfolio is recommended to find out how it performs during up and down markets. A recommendation will be made based on the results of your review.
Over the years I’ve noticed clients who have a financial plan are calmer during market routs than those who don’t have a plan. When volatility increases I’m able to review their plan to see how it’s performing and, more importantly, if the client is still on track to reach their goals. Also, when a client moves money in and out of their account I will run a stress test on their portfolio to see how the flow of funds affects their situation. During these stress tests I’ve found the day to day movement of the markets has little, to no impact, on the outcome of their financial plan. The daily volatility is merely an irritation.
The daily average movement for the Dow Jones has been .04%, or $4 per $10,000 invested, for the past five years. However, 45% of the time the market fell with several drops exceeding 2%. The market has risen 58% over the past five years despite these down days.
Expanding the data to cover 30 years, the market has averaged monthly volatility of .6%, or $60 per $10,000 invested. It has risen 1,058% and closed higher 63% of the time. The best monthly close was October 2002 rising 9.6%. During the past 30 years the market has never had a close where the index rose more than 10%. This hasn’t been the case on the downside. The market has lost more than 10% seven times during this run. The worst close was August 1998 when it fell almost 18%. The down days have been fewer but more violent.
What should you do if the market volatility is stressing you out? Here are my remedies.
1. Sell your stock holdings to your comfort level. If you’re worried about losing money in the stock market, you own too many stocks. Reducing your equity allocation may give you more peace and allow you to sleep better at night.
2. Stress test your portfolio. A review of your holdings will give you a picture of how your portfolio performs in bull and bear markets. Once tested, you can decide if you need to increase or decrease your equity exposure.
3. Add bonds to your account. This past week bonds performed well because market driven interest rates fell, and the fear factor rose. I know yields are low and the Fed is raising rates, but bonds can provide a level of safety not found in any other investment. Bonds complete the asset allocation picture.
4. Complete a financial plan. If you don’t know where you’re going, how will you know when you’ve arrived? A plan will be your financial check-up and it will give you and your planner insight into your financial life. Adjusting your plan and investments to your goals will give you confidence to withstand the market’s onslaught.
5. Rebalance your portfolio. A quarterly, semi-annual or annual rebalance will keep your risk level and asset allocation intact. Rebalancing will adjust your holdings because of the markets rise or fall.
6. Think long-term. Over time, the stock market has always risen. Don’t let short-term market moves derail you from achieving your long-term goals.
Stocks fluctuate. The market has been rising and falling for hundreds of years and this trend will not cease any time soon. However, the long-term pull of the market has always been higher. If you’re comfortable with your financial plan and goals, then buy the dips. The long-term trend is your friend, my friend.
Are you ready for your financial stress test?
Do not be anxious about anything, but in every situation, by prayer and petition, with thanksgiving, present your requests to God. ~ Philippians 4:6
Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX. For more information please visit www.parrottwealth.com.
Note: Past performance is not a guarantee of future returns. Your returns may differ than those posted in this blog and investments aren’t guaranteed.
 Yahoo! Finance