If you’ve been reading the financial news, you know that all is not well overseas.
Greece, mired in a debt crisis and deep recession, went to the brink last week before agreeing with its creditors on a last-minute bailout. And China’s stock markets—inflated by easy credit and government cheerleading—ran into severe turbulence before Beijing stepped in to stem the bleeding.
Both Greece and China remain on very fragile footing, and may well produce more bad news in the weeks and months to come.
The question for investors is how to react to the trouble abroad. Many have reacted with impulsive selling—which helps to explain why the U.S. stock market is flat so far this year.
But for long-term investors, patience is the key. Steel Peak’s portfolios are built to navigate the normal ups and downs of the market. And while market volatility is normal, the only real risk at this point is making decisions based on headlines and emotion.
Well-constructed portfolios hold a diverse mix of asset types, domestic and international, across different sectors and with different market capitalizations. When one type of asset is down, another may be up, protecting you against avoidable portfolio losses and helping you to reach your goals more smoothly over time.
Diversification reduces portfolio risk, and history shows diversification’s benefits grow that the longer you hold a diversified portfolio, the greater the benefit. With that in mind, consider the following advice as events in Greece, China and elsewhere play out:
• Ignore the herd. In past blogs, we’ve written about the evolutionary hardwiring that can undermine us as investors. One very human instinct is to follow the group. Over the millennia we have internalized the fact that staying together means safety. In investing, it’s often the opposite. An investor like Warren Buffet didn’t get to where he is by following other investors: He has always invested with conviction, and stayed the course during turbulent times. Be like Buffett.
• Think long term. Market volatility is normal. We repeat: Market volatility is normal. There are long stretches where the market will rise. At other times it will fall, or remain flat. The trajectory of the market has never been a straight line, and you should not expect it to be going forward. Reacting to the short-term zigs and zags of the market with impulsive buying and selling is a recipe for failure.
• Turn off the TV. Modern humans are swamped with information thanks to our wired world. And virtually all of this information is devoid of crucial context. On their own, bits and pieces of news can alarm folks so much that they make rash decisions. But set within historical context, they appear like waves in a large ocean—not great, but nothing to worry about. Of course, it’s impossible to avoid the headlines, but seeking them out may serve only to make you anxious about things beyond your control.
Finally, if you are concerned about how events might affect your portfolio, we invite you to check in with us. One of the great benefits of working with a financial advisor is the reality check that your advisor can provide. We’re happy to explain what’s in your portfolio and the reason it’s there—and why you’re in good hands.