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Views on Volatility

The recent market movements, mostly downwards, naturally spark a lot of attention both within the financial industry and without. We have seen lots of comments, posts, articles and other references to the markets and investing and will, no doubt, be seeing a lot more in the next weeks. Knowing there is so much said, it leads one to wonder what to take away from it all and how much attention to pay to the markets and results.

With such sudden changes, including last Monday’s 1,000 point drop in the Dow, many investors are moved to action or reaction. They might have – themselves or through an adviser – set limits at which certain holdings are to be sold or purchased and saw those implemented. They could simply ride out the market changes, watching but not acting. Or, worst of all, an investor might react to the market by making an impulse purchase or sale. Reacting in fear to market activity, just like basing decisions on greed, generally does not work to the investor’s advantage.

A proper understanding of the markets and investment goals would tend to lead to one of the first two approaches, maybe by a rebalancing when the portfolio holdings move a bit out of our desired mix. The idea is to have a plan in place for such market moves, even if the planned action is minimal in scope. One of the adviser’s tasks with clients is to keep them focused on the plan and staying with it even when instinct – fear and/or greed – suggests otherwise.

My favorite story from this recent market upheaval is the adviser who reported that several of his clients called when the market took its biggest drop on Monday. They did not call for reassurance or advice, he said, instead they called to make sure the adviser was OK. Now doesn’t that really put things into a different perspective? 

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