The volatility of the stock drop has many investors rethinking the status of their portfolio and their retirement. This has left many wondering how to invest after “Black Monday”.
Stocks opened with low marks on Monday, August 24, 2015. The Dow Jones Industrial Average dropped more than 1,000 points and the S&P 500 selloff curtly reached correction territory, causing the U.S. market to go into frenzy. But, by the end of the day most of the fear subsided and the market was more grey than black.
Black Monday’s volatility, although some days passed, has placed a nugget of doubt in many investors’ minds. But, there is some good news in all the turbulence. A weakening U.S. market did not prompt the selloff; instead it was a result of fear of China’s unstable and dwindling economy. It was also prompted, though less heavily, by the Federal Reserve’s suggested increase in interest rates for the first time since 2006. While China’s economic standing may present global distress, the U.S. markets will remain the same.
According to Money Morning’s Chef Investment Strategist Keith Fitz-Gerald, patience will win the day for investors.
“A day or two of bad trading, or even a few months of nasty stuff, do not qualify as a crash,” Fitz-Gerald said today. “It’s a correction and it’s normal. You want the markets to periodically scare the weak money out for the simple reason that chaos always creates opportunity.”
This recent surge in market volatility only solidifies the importance of understanding market risk when investing. In this article, we will be referring you to the Financial Industry Regulatory Authority’s (FINRA) guide to understanding market risk:
“Investments involve varying levels and types of risks. These risks can be associated with the specific investment, or with the marketplace as a whole. As you build and maintain your portfolio, remember that global events and other factors you cannot control can impact the value of your investments. And be sure to take both business risks and market risks into account.”
Most investors understand that there is risk when investing their assets. It also known that in many cases the higher the risk the greater the reward. Investing with your future in mind can be a daunting task. This is where market risk comes into play.
One of the factors you should consider when investing is determining your risk tolerance. Today, taking on more risk to potentially achieve higher expected returns might not suit your individual risk tolerance.
One well-established strategy for balancing risk and return is through a balanced portfolio. An example of a well-balanced portfolio includes bonds (for stability) and equity (for growth). This mix of investments can be reduced or increased to fit your investment portfolio needs.
Much like a pyramid model your investments should be equal parts stability and promote growth. This graph serves as an example of a traditional, balanced portfolio that can cushion investors against turbulent markets and risks.
This chart is strictly hypothetical and is provided for illustrative purposes only. It is not reflective of any specific portfolio mix. It represents only a portion of investment classes for bonds and equities. It should not be used as a benchmark for balancing a portfolio or any other financial planning objective. Asset allocation and diversification cannot ensure profit or protect in declining markets.
Although traditionally balanced portfolios can be beneficial, there are various ways investors can find equilibrium in their portfolio. If you are unsure where to begin, contact a professional wealth advisor that can help to establish or rework a portfolio that reflects your needs and the risks you are willing to take.
We understand that any market crisis can cause concern for the average investor. However, history continues to reinforce the fact that markets can bounce back, and that there are often many investment opportunities to take advantage of during volatile times as you continue to focus on your long-term financial goals.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and materials provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2015 FMG Suite.