By Daniel Cohen
As I drove home one recent evening, the roads were wet from rain and the temperature was dropping. The forecast called for freezing temperatures throughout the evening. I felt relaxed as traffic was light. The rush hour was over, and speeds were lower than usual due to the conditions. I got a call from my ten-year-old son asking when I would be home. I told him to wait up since I would be home shortly. Minutes after I hung up, the outside temperature reached 32 degrees and a car spun out of control slightly ahead of me. I was sure it would hit me! I held the wheel firmly, stayed in my lane, and as quickly as that car careened toward me, it swerved away without colliding and I continued home. It was so nice to see my wife and four kids once I arrived. Driving is usually peaceful, but at times can be treacherous.
Anticipating Ups and Downs
Investing can be a comforting and rewarding experience, but for some, the daily volatility, regular pullbacks and market corrections cause a lot of stress. To be a successful investor, you need to develop a plan and stick to it. Although current events in Ukraine were not anticipated just months ago, there is no reason to stop investing or to make a dramatic change to your long-term investment plan. And, for newer investors who have not experienced previous market cycles, recent headlines can easily test your discipline.
Much like driving in imperfect conditions, investing is a pathway to reach your goals with frequent tests to see if you hold the wheel or spin out of control. Decisions you make at times of heightened volatility can affect your financial future, and potentially, your children’s.
Another point to consider is that during volatile markets due to a global situation such as the Russian invasion of Ukraine, not all investments behave the same way. Watching the news or reading the newspaper, you will know how the broad market is performing with headlines of big up or down days. The media tends to report on events that stir the most emotion. However, unless you are invested solely in the market indexes and your performance is completely correlated to the market, your individual performance is likely to be different that what is being reported. During every market cycle there are companies and sectors that perform well while everything else is doing poorly. And during strong markets, some positions may underperform.
No Crystal Balls
Two years ago, there was widespread sentiment that energy related companies should be divested from a portfolio, and many followed the trend and sold shares of any energy related company while the sector was trading at decade low valuation levels. Some of the portfolio managers who were interviewed pridefully boasted that they had eliminated their exposure to that sector. For a while their decision may have seemed wise, but now two years later, that sector is hitting all-time highs and some energy companies like Exxon and Chevron have not only maintained their dividends during the last decade but have increased it annually while rewarding those investors maintaining their ownership with strong price performance this year. The price was volatile during the past decade for the energy sector but maintaining even a small exposure has enhanced a portfolio with the regular dividend income and recent price strength.
Like the energy sector today, other sectors such as utilities are holding up well with positive gains this year. A diversified investor needing funds now would own some positions in these sectors and could draw on them at these attractive levels. It is always better to sell high than to sell low. In each market correction there are areas of strength that can be used as a source of funds if needed rather than selling those positions that are temporarily down. At the same time, someone investing funds for the long-term should research to see what is most out of favor to find advantageous opportunities.
For years, the technology sector was the top performer and positions became expensive. Now technology is the poorest performer and there are opportunities to invest at better valuations. This year, strategies with a heavy focus on dividend income have been outperforming the market.
Steady at the Wheel
Markets like we are now experiencing are a great test of your investment discipline. Whether you invest on your own or hire a financial advisor to take on that responsibility, now may be a time to review your financial plan and investment allocation. Of course, if at this time you are properly allocated, you may find no change is needed. There is a feeling that in time of volatility change is needed, but often the best course of action is to hold the wheel firmly, stay in your lane, and wait for the turbulence to end.