Short Term Volatility

Hi. My name is Matt Daly, and this is CJ Harrison with Decision Point Financial. Thanks for tuning in to the Financial Success Academy.

Today we're going to discuss two of the most common questions we get from clients, especially during periods of high volatility or increased fluctuations in financial markets.

The first question is: "I am worried about the markets. Should I go to cash or change my investment allocation to something more conservative?"

The short answer is no. We never want to adjust our long-term investment strategy as a result of short-term fluctuations in the market. Such volatility is normal and even expected over short periods of time. A recent publication by Dimensional Fund Advisors showed from the year 2000 through 2020 that 16 of the 20 years were positive and had an average annual return of 17%. The important takeaway, however, is the average intra-year decline in the market was negative 13%. The moral of the story is that short-term declines in the market are entirely normal.

Trying to time the market correctly and consistently over time is nearly impossible to do. The most recent example of this is the market volatility from the COVID-19 pandemic in 2020 as of March 16th, 2020. US markets were down roughly 35%. Mid-March certainly did not seem like the end of market volatility as economic shutdowns were in full swing. However, from that point, US markets started to increase and ended the year positive roughly 21%.

The second question then becomes "If we're not going to run to cash or bonds for short-term relief from volatility, then what do we do?" Nothing.

Seriously, we just do nothing.

Our job is your advisor and investment manager is to evaluate the opportunities to rebalance your investments, by selling what's doing well and buying more of what's doing poorly. Volatility can be your best friend if you let it. Your account is well diversified in several funds that hold over 12,000 companies in more than 44 countries around the world. As you've witnessed over the last few days, major news and changes in investor sentiment day to day can create swings within the funds that you hold. But by being broadly diversified, you are hedged against concentration risk and the extreme movements that you would otherwise be subject to when holding individual stocks or bonds.

I can assure you that we are frequently reviewing the performance of the funds and overall market conditions to determine whether or not changes need to be made to the investments in your portfolio.

We hope this has been helpful and as always, stay safe and reach out if we can be of assistance.