Market volatility can create uncertainty and anxiety. Understanding the factors
contributing to market volatility is crucial in developing effective strategies to protect investments and manage risk. While it is important to consider market fluctuations, working with an advisor can help manage risks and opportunities during these periods.

What is Market Volatility?

Market volatility refers to the extent and speed at which prices fluctuate within a defined period. When the stock market experiences daily rises and falls of 1% or more over an extended period, it is considered volatile. Several common factors contribute to market volatility, including slowing economic growth, rising inflation, geopolitical conflicts, and domestic policy changes. Recognizing these factors helps investors gain a better understanding of the market’s behavior and anticipate potential risks.

Presently, the public equity markets are exhibiting rich valuations compared to near-term earnings growth and macroeconomic growth. Concurrently, the Federal Reserve has been implementing measures to combat inflation, such as raising interest rates and reducing the money supply. These actions have unintended consequences, and it is expected that further repercussions may arise over the next 6-12 months. Investors need to be aware of the market’s current state and its potential impact on their investments.

Managing Risk in a Volatile Market

Managing risk in a volatile market requires adopting key strategies and approaches. Don’t let short-term market changes affect long-term investments or make hasty decisions if you’re a long-term investor. Instead, focus on earning interest on cash holdings, currently averaging around 5%, without taking excessive capital risk. Maintaining a disciplined approach to risk management helps protect investments during periods of market turbulence.

To identify potential risks and vulnerabilities in an investment portfolio, it is essential to evaluate investments based on their consistency with the stated goals. By aligning investments with the pathway to achieving these goals, investors can ensure that their portfolios remain on track. Regular monitoring and review of the portfolio’s performance help identify any deviations or potential risks that may require adjustments.

Utilizing Diversification and Asset Allocation

Diversification and asset allocation are powerful tools for mitigating risk in volatile markets. By creating
financial plans and retirement projections, financial advisors can construct client portfolios that focus on their specific goals. This goal-centric approach enables the preservation of portfolios through market cycles, even during challenging periods.

Balancing asset classes and diversifying investments involves investing in high-quality companies that generate significant dividend income and consistent capital appreciation. Additionally, blending portfolios with municipal and taxable bonds, depending on individual circumstances, can further enhance diversification and risk mitigation.

Opportunities in Volatile Markets

While volatile markets pose challenges, they also present potential opportunities for investors. By actively managing core investment segments, portfolio managers can capitalize on underpriced assets and identify overpriced ones. The aggregation of specialty asset segments into one collective portfolio allows for a comprehensive and strategic approach to navigate volatile markets. It is essential to stay vigilant and seize opportunities that align with long-term investment objectives.

Tailor Investment Plans for Short-term and Long-term Objectives

Creating investment strategies that consider both short-term cash-flow needs and long-term goals is crucial. Clients often require immediate liquidity while also aiming to ensure that their portfolios outlive them and provide for future generations. By developing tailored investment plans that account for these different objectives, investors can strike a balance between meeting immediate needs and achieving long-term financial security.

Active versus Passive Management

During volatile markets, active management becomes particularly important to remain opportunistic. Active management enables portfolio managers to assess underpriced and overpriced assets in real-time, adjusting investment strategies accordingly. Passive management is good in stable markets, but adapting to changing conditions is important during volatile times.

Should strategies be adjusted based on Market Conditions?

Investment strategies should be adjusted based on evolving intermediate and long-term market conditions. Regular research and analysis from a fresh perspective enable investors to stay ahead of market developments and make informed decisions. By monitoring market trends and reassessing investment strategies, when necessary, investors can align their portfolios with the changing market landscape.

Keep Emotions in Check

Periods of market volatility can evoke strong emotional reactions. At BHPW, behavioral finance is a core part of how we collaborate with our clients to manage their emotions and expectations. Clients typically feel most comfortable when their portfolios exhibit low volatility while delivering consistent income and growth. By adopting a “hitting singles and doubles non-stop” approach, which focuses on steady progress and incremental gains, you can help to mitigate emotional distress and promote a long-term investment mindset.

Market volatility can be challenging, but with a strategic approach, investors can protect their portfolios and seize opportunities. BHPW is here to give you guidance to navigate these complexities. Reach out to find out how we can help.

Beverly Hills Private Wealth, LLC is a registered investment adviser. This is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Beverly Hills Private Wealth, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Beverly Hills Private Wealth, LLC unless a client service agreement is in place.

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