Don’t let volatile markets shake up your investment strategy

When it comes to investing, pullbacks and corrections — declines in stock prices of at least 10 percent from their recent highs — are routine, although they don’t usually feel that way as they happen.

One example of this is the recent October 2018 selloff, as a number of factors reached critical mass, driving the U.S. equities and other markets sharply lower. As an investor who is depending on your investment portfolio to help meet some key goals, such as a comfortable retirement, how should you respond to this recent round of market turbulence?

First, it’s important to understand just what’s causing the turmoil. As always, market movements contain at least some elements of mystery, but most experts attribute the latest round of volatility to a combination of these factors: a run-up in Treasury yields and related concerns about a higher interest rate environment; perceptions by some that the Federal Reserve may shift to an unnecessarily aggressive rate hike pace; a fierce decline in global tech stocks primarily due to tariff risks, regulatory threats, above-average valuations, and signs of peak activity in bellwether semiconductors; increasing likelihood the U.S.-China trade dispute will intensify, and the ratcheting up of overall tensions between the two countries; concerns about China’s slowing economic momentum; potential wrinkles in the U.S. Q3 earnings season related to margin pressure, tariff angst, and the strong dollar; and the coming transition to a slower, more normal U.S. corporate earnings growth rate in 2019.

However, it’s equally as important to look beyond the headlines of the day. Despite what is happening elsewhere in the world, the U.S. economy is reasonably solid — employers are adding jobs at a pretty good pace, wages are rising, and home prices are up. Furthermore, consumer debt is at manageable levels and interest rates, even factoring in a small bump over the last couple years, are still near historic lows. To sum up, we’re in a lot better shape than we were heading into 2008 and early 2009, a period in which the financial markets fell into a deep hole.

For many investors — particularly those very close to retirement — simply understanding what is really going on doesn’t make the recent portfolio declines any more palatable. Still, now may not be the best time to make any drastic changes to your portfolio. Of course, staying calm doesn’t mean being inactive. Keep in mind that a market correction, by definition, means that prices have dropped for most stocks, including the ones that represent strong companies with favorable prospects, and a correction is often accelerated by investors selling shares to supposedly cut their losses. When prices are down, it could actually be a good moment to buy.

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You also may want to take this opportunity to consider whether you need to further diversify your holdings. In a downturn, just about everybody takes a hit, but if you were affected particularly strongly, you might be over-concentrated in just a few types of stocks. You can help reduce the impact of volatility on your portfolio by owning a mix of domestic and international stocks, bonds, government securities, certificates of deposit (CDs) and possibly even “alternative” investment vehicles, including real estate and commodities such as precious metals.

Ultimately, you don’t have to scuttle your long-term investment strategy merely on the basis of a few bad weeks or months in the market. If you’ve created a strategy that reflects your risk tolerance, time horizon, and financial goals, and if you make needed adjustments over time, you’ll give yourself the ability to look past today’s headlines.

Beth Norman is senior vice president for RBC Wealth Management and partner on The Droster Team.

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