Filbrandt Reports

How to Protect Resources During Market Volatility

Volume 19, Issue 2



Executive Summary:

In this report, you will learn:

  • Market events can prompt emotional reactions which can be counterproductive to your portfolio’s health
  • Why rebalancing your portfolio is important, particularly if you don’t monitor your portfolio regularly
  • Long-term portfolio considerations should always have priority over short-term strategies
  • Many universities offer low-volatility financial products that can benefit your portfolio in turbulent times

 

Many university professionals are concerned with recent market volatility and the impact it is having on their retirement accounts. Here are three important steps you can take to protect your retirement resources during a volatile market environment. At these times, it is critical to have an effective plan and execute that plan.

1) Don’t let emotions cloud your judgment

Fear of a continued downward trend might be motivating you to want to sell stocks, but the proper approach is to allocate appropriately between stocks and bonds (or other low-volatility assets) in your portfolio. Low-volatility assets are there to protect you when stocks go down, while stocks are for growth potential.

Even professional money managers find it difficult to overcome the effects of their emotions. They read the news and the data every day, and can’t ignore it. They have to be cognizant and aware of it, but are trained to ignore it. Many professional money managers hire someone else to manage their personal portfolios to remove the emotional element from the process. There’s always been uncertainty in the world, including natural disasters, terrorist events, wars and political events. There’s always something you can worry about. We recommend ignoring the headlines of the day when it comes to making investment or financial decisions. When emotions become involved in finances, people often make a bad decision. Short-term considerations should never supersede long-term investment goals.


2) Rebalancing your portfolio

During the financial crisis of 2008 to 2011, when stocks were down almost 50 percent, many people were clamoring to get out of the market. Instead, they should have been rebalancing their portfolios. Rebalancing helps keep portfolio risk at a level appropriate for your situation. If you don’t monitor your portfolio regularly, it can get out of balance.

People who started the financial crisis period with a 50 percent equity and 50 percent “fixed-income” (or, bond equivalent) portfolio may have seen that ratio fall to equities equaling only 30 percent at the low point of the stock market plunge. So when the rally came, those people didn’t have enough equity value remaining to dig their way out of the hole. Philosophically and statistically, they should have been adding to stocks, but emotions told them to sell even more.

Here’s the rebalancing process:

  • Determine your ideal asset allocation, and use it as the basis for the following process, which you should do at least annually
  • Determine your portfolio’s current asset allocation
  • Buy and sell assets to achieve the desired asset allocation

If you are rebalancing your own portfolio, please exercise caution.  In the past, the primary investment category people have turned to for safety and diversification from the stock market has been bonds, and we’re seeing more risk in bonds as interest rates rise.


​ 3) Consider alternatives to bonds

Many universities offer tools other than bonds that can help diversify a portfolio. Examples include TIAA Traditional, Valic Fixed Account, Minnesota Life General Account, or other stable value funds that are characterized by less volatility and risk than equities. Our philosophy is that this type of asset is a key cornerstone of portfolios in any market situation. Utilizing these types of assets also ties in well with rebalancing. These types of investments are very good tools for the fixed income “bucket” and can be a useful replacement for bonds.

This is important because the market price of bonds has an inverse relationship with interest rates. If interest rates rise, bond prices decline. (The inverse is also true — when interest rates drop, bond prices increase.) With more interest rate hikes by the Fed a distinct possibility in the coming year, bonds may not be your best low-volatility option for the portion of your portfolio that is for value preservation. Evaluating and learning more about these types of investments could be crucial for your portfolio.


Volume 19, Issue 2

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