I thought this would be a good time to refocus any of my readers out there who may be getting distracted by the recent market decline. For the majority of investors, market volatility should either be ignored, or treated as an opportunity to add to your portfolio at “sale” prices. Even for those of you who are retired and may be taking occasional distributions to supplement your other income sources, there is likely no need to sell positions right now to raise cash. Doing so will likely be a regrettable decision, even if the market moves lower before it eventually trades higher. Well-built, diversified portfolios, should be able to withstand prolonged periods of market volatility, just as they always have in the past.
As for what is going on, I’m watching the same headlines that all of you are. The continued drop in energy prices seems to be the primary driver of market declines. While the cost savings generated by plummeting oil prices is certainly a positive in the long run, many view the current price declines as indicative of economic problems to follow. Further, there are some energy companies that might not make it through this period, especially those involved in the exploration and production of oil and gas.
Beyond the energy issues, the Fed raised rates for the first time in many years during December. The Fed eased us into this policy change and only raised rates slightly, but it does begin what will likely be a long pattern of rising interest rates, even if they pause this year as global markets continue to struggle. Broadly speaking, normalizing interest rates is a healthy process, but in the short-term it presents a learning curve for the market. The effects of borrowing costs moving up will impact not just stock and bond prices, but the spending power of everyday folks as well.
The other major headline which has sparked a few selloffs over the past year has been the economic slowdown in China. The process of China gradually shifting away from manufacturing and into more of a consumer-based (service) economy is not an unhealthy one. However, we are seeing the fallout from that shift in the form of declining demand for commodities, tying into the oil price issue discussed above. That hurts many commodity exporters, but particularly the emerging markets which have relied so heavily on continued demand from China.
Returning back to the purpose of this article, most investors will ultimately look past short-term factors such as energy price volatility, interest rate movements, and growth rates in China, when building a portfolio. The economic issues which come about each year are highly unpredictable and will remain that way. If we could anticipate exactly what economic issues would occur and their exact timing, we’d all become very rich placing bets. For most people, however, trying to time the market is a losing proposition.
Generating the right asset allocation mix most often boils down to your time horizon, risk tolerance, and goals. For younger workers with decades till retirement, allocations are often mostly stock. For near-retirees who will be drawing portfolio income, allocations are often more of a mix of stocks, bonds, and cash. The exact breakdown of your overall assets is something you may want to build and continuously review with your financial professional.
If you have questions about your portfolio or wish to review your accounts, please don’t hesitate to contact me.
Premier Wealth Advisors LLC
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Author: Navigating the Financial Blogosphere
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