Contributed by: Angela Palacios, CFP®
In the past week the S&P 500 tumbled amid increased volatility, wiping out all gains year to date and sending the index into negative territory. Activity like this can be unsettling so please find some of our thoughts and observations following.
Why is this happening?
Uncertainty around whether or not the FED will raise rates next month is concerning in general. Markets don’t like this uncertainty as we move closer to September.
Weak growth in China and Emerging markets are spilling over into commodities and the currency markets causing concern in general that there will be contagion to local markets.
What have we done to prepare?
We expect volatility like this to happen from time to time. The past several years have been an anomaly with little to no volatility. Reacting is rarely a profitable move for an investor but acting ahead of time can be. We have structured a portion of portfolios with active managers that have been building cash positions for just these moments. When they see attractive opportunities they can put that cash to work.
Bonds were never abandoned; in fact, we have increased our exposure here over the past year. Even when faced with rising interest rates, we believe bonds are an important piece of diversification as they have held up very well in this short downturn giving positive performance.
We utilize a bucket strategy when managing clients’ accounts to provide cash flow that is needed even when markets are at their most volatile. The first bucket of defense is the cash that we hold to fund any current cash flow needs. The next bucket is short term and high quality bonds which as mentioned above usually hold up well in a market rout. Your personal situation dictates how much is appropriate to hold within these buckets.
What else can you do?
Make sure your long-term allocation is still appropriate
Double check thatyour time frame is correct for the investments in your portfolio
Review and consider your risk tolerance for those investments
A correction doesn’t necessarily mean a recession is looming. None of the indicators we are following point to a recession on the horizon so we feel this is just a temporary pullback. This is the time when you lean on your financial planner to help you make the right decisions for your goals and needs and not act out of panic or fear. Please feel free to reach out to us with any concerns or questions you may have, we are here for you!
Angela Palacios, CFP® is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well as investment updates at The Center.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Angela Palacios, CFP® and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Investments mentioned may not be suitable for all investors. Past performance is not a guarantee of future results. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Individuals cannot invest directly in any index. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected. Diversification and asset allocation do not ensure a profit or protect against a loss.