Napolitano looks at money.
Truth be told, no one can predict what effect tariffs and resulting trade wars will do to our long-term economic picture. Some say that it doesn’t matter and others will want to tell you that the sky is falling.
Your context, however, may be all that matters to you. Are you anxious because the investment climate may remain volatile and your investments may underperform over the next month, quarter or year? Or, are you anxious that your retirement for the next 30 years may be in jeopardy?
Clearly trade tension has financial markets worldwide a bit jittery. But the reality is that these markets don’t know any more than you and I, and are generally reflective of there being more scared sellers in the markets than opportunistic buyers.
Market directions are usually based on sentiment, and investor fears of what may happen. And as we’ve seen before, as news breaks that wipes away the fears of a prolonged trade war, the financial markets respond positively and often precipitously.
This is one reason that buy and hold investors don’t react and get in and out of markets. These investors understand volatility and the ups and downs of long-term investing. They realize that timing a downturn and then the upturn can be a fool’s bet, especially when you’re limiting your time horizon to what may be considered short term.
To relieve your day to day anxiety over your investments, consider the following:
Understand how much volatility your current portfolio may deliver. Stress test your portfolio and your risk tolerance. There are analytical tools that can tell you how good or bad your holdings may perform in any given time period. Test all possibilities before you actually sign on to a given range of risk and volatility. Past performance is no guarantee of future results.
Next, calculate your desired rate of return and build a portfolio that’s able to deliver those returns. This new portfolio will show how changes may affect your level of volatility and total return.
Avoid concentrated positions. A concentrated position may be any investment that occupies more than X% of your portfolio. Experts vary on how much is too much. Some prefer to see concentration in any one holding or asset class to 10% while others or your ability to withstand losses may indicate a larger percentage is acceptable. This risk should apply to your closely held business, one company or large pieces of real estate.
Last, keeping enough cash or cash equivalents to ride out any down market cycles may help keep you focused on the long term. The question is, how long does it take to recover from a downward market cycle?
That depends on your asset class and sector selections. Investors fully invested in equities typically take longer recoveries than those in diversified portfolios that include cash and fixed income. Though it’s important to note there is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.