Volatility Isn’t Always a Reason To Rethink Your Portfolio

QUESTION: Should I be rethinking my portfolio strategy, considering global events so far this year?

ANSWER: Given the extreme market volatility we’ve seen over the past seven or eight weeks, it’s natural to wonder whether it’s time to rethink your portfolio strategy. The answer is probably not, but maybe.

Why not? For starters, your portfolio should be diversified across multiple asset classes, including boring things like cash and bonds that are generally not impacted by these crises. In other words, we preach and practice diversification to absorb shocks from unforeseen events like wars, pandemics and energy shocks.

That doesn’t mean your portfolio wasn’t lower over the past couple of months. It means that while some assets fell, others remained stable, or even appreciated, providing liquidity, if needed, for spending or emergencies.

Another reason to stay the course is that, prior to the recent conflict, the U.S. economy was on relatively solid footing. Inflation, while pesky, was not out of control, and the job market had softened but was not shrinking. The outlook pointed toward a soft patch followed by a return to more typical growth.

In market terms, that environment generally translates to moderate volatility accompanied by growth. If the Strait of Hormuz situation stabilizes, that outlook still holds. Even if tensions flare up again, markets may experience more short-term disruptions, but lasting damage typically requires a prolonged crisis.

When should I reconsider my strategy? The recent volatility has served as a real-world test of your risk tolerance. If you found yourself losing sleep or feeling significant anxiety about your investments, it may be worth discussing a more conservative allocation with your advisor.

While there’s nothing wrong with reducing risk, especially if it helps you stay disciplined during turbulent events, it’s important to balance that with the reality that the markets’ long-term direction is up. While it’s prudent to ensure you can both financially and emotionally weather market volatility, it’s equally important to maintain enough exposure to benefit from long-term growth, even when the short term looks scary.