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Market Volatility

Unless you live under a rock (or totally unplugged), it’s impossible to avoid hearing about the stock market ups and downs. The historic bull run we’re experiencing has both industry professionals and investors waiting for  the other shoe to drop. It seems like every other week we’re hearing of a new indicator predicting a downturn, but the market keeps chugging along.

Earlier this year the bull market reached double digits and turned 10 years old! That’s a huge milestone from a historical perspective – we surpassed the previous record bull market of the 1990s which lasted just shy of 9.5 years. These ten years have been accompanied by market swings in both directions, a president change (and resulting policy change), economic developments and law changes, etc. With each new change comes a new stock market can of worms, be it investor wins or woes or changes in confidence and panic.

But Volatility is a Good Thing

If I had to guess, you’re shaking your head at “volatility is a good thing” because generally the higher the volatility, the higher the risk of a particular investment. Most people invest with the intention of making money, not losing it, so what gives?

The fact of the matter is that if the market had zero volatility and remained flat, it wouldn’t be much of an investment. You’d put in $100 and when you were ready to take your money out, you’d get back $100 (assuming no fees). Volatility is what makes the market investable, so it is actually a good thing.

What most people think of when they think of volatility is the erratic nature of some investments to have huge swings in prices (or returns). And, depending on your risk tolerance, I agree volatility can be scary. If you’re nearing retirement and will soon be taking withdrawals from your portfolio, it’s generally a safe bet to reduce the risk in your portfolio so you aren’t forced to take withdrawals at inopportune times (like when it’s a down swing), but this reducing risk can mean different things to different people.

Sound Planning Means Sleeping Soundly

When you have a sound financial plan, and an advisor who accounts for your upcoming withdrawals by having 2, 5, and 7+ year plans for your money, you can sleep better at night knowing your portfolio is built to withstand the volatility. This isn’t to say your portfolio won’t ever see the effects of volatility, but it DOES mean you have protection against the volatility.

The average market cycle (from peak to peak or trough to trough) is five years. So if your portfolio is built to withstand the ups and downs for over seven years, odds are you’re in better shape than most! That means when a tax law changes or when trade wars ramp up, you can have confidence in your portfolio when everyone else is panicking about theirs. You’ll see it for what it is – a long term plan to help you reach your goals, so a short term shake up won’t shake your financial security.

Embracing the Volatility

As you’ve read above, volatility is much like everything else – when you have a solid plan, you can hope for the best while preparing for the worst. Capitalizing on volatility with a long-term plan is how people “win” at investing. To quote one of the most successful and famous investors of all time, Warren Buffet:

“Remember that the stock market is a manic depressive.”

“Calling someone who trades actively in the market an investor is like calling someone who repeatedly engages in one-night stands a romantic.”

“The stock market is designed to transfer money from the active to the patient.”

So as indicators are pointing up one day and down another, breathe easy knowing you have a sound (and patient) financial plan with Custom Wealth Management. The long game is where you’ll find success and we’re happy to be on that journey with you.

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