Keeping Market Volatility in Perspective

Market volatility returned with a vengeance last week, reminding investors and financial advisors that pullbacks happen, and they can be triggered by any number of factors.

In the most recent example, which included the tech-heavy Invesco QQQ Trust (QQQ) dropping nearly 8% over the first three trading days of August, weak employment data was considered largely to blame. But attentative investors know that market watchers and pundits typically cling to the most simplified reasons for financial chaos, when it is often more nuanced.

For financial advisors this proved to be a time not for shrewd investment moves, but for reminding nervous clients that volatility happens and that a sound investment strategy in July still qualifies as a sound investment strategy in August.

Market Volatility Exposes Individual Tolerance for Risk

Preventing investors from panicking is a large and underappreciated part of an advisor’s job. But the foundation for that effort should start with a portfolio that suits the investor.

In a new etf.com series, Portfolio IQ, we are illustrating how financial professionals are managing their own money based on their experiences and circumstances to show their many different approaches

Rick Wedell, chief investment officer at RFG Advisory in Birmingham, Ala., is comfortable, at the age of 45, with a 78% allocation to equities.

Meanwhile, Tom Graff, the 47-year-old chief investment officer at Facet in Phoenix, Md., has 100% of his portfolio in stocks.

For anyone brought up on a diet of balancing a portfolio with 60% stocks and 40% bonds, these examples might seem a bit off, especially for individuals trained to help others invest and save.

Equities are supposed to provide more volatile growth, and bonds are supposed to provide more predictable ballast in a portfolio. But after a year like 2022, when stocks and bonds joined almost everything else in falling off the table, a trend emerged toward shunning bonds and just riding the equity market waves. This trend has largely paid off.

But we know that bonds serve a purpose and as Christine Benz, director of personal finance at Morningstar, recently pointed out, that purpose comes into clearer focus the closer one gets to retirement.

Even though the markets have largely recovered from last week’s pullback, and QQQ is still up nearly 12% this year, Benz believes investors might want to use this as a reminder that pullbacks happen.

“My contrarian take is that some investors, specifically people within five years of retirement or already retired, should consider using this recent market volatility as an impetus to sell stocks,” she wrote.