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Posted on January 9, 2019

Yo-Yo Vertigo: Understanding Market Volatility

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By Kevin Engbers, CFP®, Wealth Advisor

In 31 years as a financial advisor, I’ve witnessed several seasons of heightened market volatility. Real estate mogul Tom Lewis offered the best metaphor I’ve seen for this market behavior: walking up a staircase with a yo-yo. Your eye is immediately drawn to the yo-yo’s small fluctuations when the real movement is the person going up the staircase. We can get just as distracted if the movement is downward – the yo-yo may go one direction, but the real movement is down the staircase.

Market volatility – the yo-yo in our metaphor – occurs when there’s a 1 percent up or down movement in the market. Historically, this kind of small fluctuation happens 32 times in a given year.  In 2017, this 1 percent shift only happened eight times and didn’t happen at all in the fourth quarter. In 2018, the market moved 61 times at 1 percent or more. We also witnessed the worst market fluctuation on Christmas Eve in history, and we’ve had several moves of more than 2 percent.

These uncertain times can heighten our anxiety as investors and distract us from what’s really going on in the market whether good or bad. Getting your financial bearings and focusing on what you can control is the best way to help you understand market volatility and keep from yo-yo vertigo as an investor.

Click here to download our complimentary guide to establishing a clear process in your investment strategy.

Points of Reference

One of the first things to do when experiencing vertigo is find some fixed points to focus on. It helps keep your brain from spinning (and you from dropping your yo-yo or falling down the stairs).  First, keep in mind that downturns are a normal part of investing. There will be some losses somewhere in the process – this is a given point of reference you should remember when you don’t see returns immediately.

Second, keep in mind that dollar cost averaging can be your friend. Faithfully putting that money toward your investments – based on your strategy and values rather than the small whims of the market – has a good chance of serving you well in the long run.

Third, risk capacity is an important point of reference for any investor. Make sure that you’ve filled out a recent risk tolerance and risk capacity analysis, so you and your advisor can help shape your portfolio and strategy according to your disposition. Your advisor can help you see through the hype to where the real movement is happening in the market and help you stay within your risk capacity.

Focus on What You Can Control

When the waters are choppy, captains can’t control the sea, only the boat. If captains use the wisdom they’ve gathered and the knowledge they’ve studied at times when the seas were calm, they’ll find their way to land. When financial storms are on the horizon, wise investors stick to the strategies and wisdom they know rather than trying to follow (or avoid) every new wave.

What does your strategy look like? A financial plan should fit your life – your time, your goals, and your comfort with risk. With your advisor, set out guideposts and mile-markers as to where your portfolio is and should be. Your portfolio currently looks like this, but are there adjustments to bring it in line with your risk tolerance and risk capacity to help you work toward your financial and life planning targets?

A solid plan gives you confidence to approach the market with your goals in mind, not to be emotionally manipulated by the latest headlines. Behavioral bias is always a danger – buying based on greed or selling based on fear will rarely provide positive results. Understanding market volatility is a great first step to investing with clarity, confidence, and holding to the plan you first laid out.

Look at your portfolio allocation to see if it aligns with your targeted risks, see that your money is put toward your passions and interest – not toward following the headlines – and do all of this in conversation with a qualified advisor.

At Pinnacle Wealth, we believe you should live life by design, not default. Our advisors know the market’s tricks and whims well – they can help you focus on the real movement rather than the yo-yo. Get in touch today and put a plan together that will help you see clearly in the days ahead.

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