Is this protracted market volatility starting to make you queasy?How can you stomach all this “yo-yo effect”, while staying true to yourlong-term financial plan and trading goals? I read two smart posts recently onthis topic and wanted to share.
First up is Financial Savvy: Investment RiskVersus Market Volatility by financial planner and Huffington Post contributor David Rae. Theauthor decouples two confusingly similar concepts, volatility and risk, with aneye towards helping investors make better informed investment decisionslong-term. It’s worth reading in its entirety, but I was particularly cheeringwhen Rae pointed out a few under-appreciated points – for instance, thatforgoing all investment risk is perhaps the biggest risk to your long-termsuccess at all. He also points out that volatility is what makes dollar-costaveraging a successful strategy for many long-term investors. Here’s how Rae explainsit:
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Let's say for example you are buying Fund Xwhich goes down the first 6 months of the year, then back up to even the next 6months of the year. The fund ended the year breaking even, but since you werebuying throughout the year, you may have ended up making money. This won't makeyou rich overnight, but it can help take advantage of volatility and reduce theoverall risk of your portfolio. You essentially outperformed your owninvestments, always a nice thing.
I’d also recommend you check out Profiting from Recent MarketVolatility by YahooFinance contributor Allan Roth. Like Rae, he’s seeking to prevent jitteryinvestors from repeatedly selling off after a market drop to their own(extreme) detriment. He starts with some longer-term perspective that mightsurprise you: what would you guess was the best-performing asset class thiscentury? Surprise: it’s bonds. Granted, this difference may be short-lived butit’s an instructive case-in-point about the value of frequent rebalancing ofyour asset allocation. Here’s Roth:
Most people are surprised to see that bonds have soundly beatenstocks so far this century. But the real point of the chart is the volatilityof stocks—especially international stocks—versus the boringness of bonds. Thatstark difference creates opportunity.
Over the period through June 30 of this year, the simple averageof the three funds turned in a rather dismal 4.49 percent annual return. But aportfolio of the same funds, rebalanced every six months in the middle and endof the year, returned an extra 0.48 percent annually, or 4.97 percent.
The rebalanced average was more than the funds themselves. If thisdoesn’t seem like much, consider that $1 million in the rebalanced portfolioearned an extra $144,690 over the buy-and-hold portfolio.
TradeKing Advisors is perfect for any investors seeking to put theserecommendations into action. Answer a few questions online, and we’ll match youwith a professionally managed portfolio that suits your needs – then we’llautomatically rebalance your assets on a regular schedule. Easy, affordable,quality and streamlined – what’s not to like?
Here’s to your strong stomach and your stronger investingbrain, traders!
CEO, TradeKing Group
[image: yoyo by Xulian Nava on Flickr]
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