Keep Calm and Ignore the Market’s Volatility

Lately, friends and acquaintances have been bringing up the stock market’s volatility in conversation. While it’s always possible for me to be an outlier, I suspect in this case that I’m not.

The magnitude of the moves is one reason market volatility is a topic of conversation. I suspect many people still view a 200-point move in the Dow Jones industrial average as significant. It’s not; 200 points represents less than 1% of the Dow’s value. Another reason is that the stock market is on pace to experience its most volatile year since at least 2011.

Through today’s close, the S&P 500 index has incurred a daily gain or loss of greater than 2% seven times year to date (six losses less than 2% and one gain in excess of 2%). This number already exceeds the total number of such days for 2012 (six), 2013 (four) and 2017 (zero). With nearly eight months still to go, 2018 is likely—but is not guaranteed—to have more days with a gain or loss in excess of 2% than 2014 (seven), 2015 (10) and 2016 (nine). If the S&P 500 does experience more such days over the next approximate seven and a half months, 2018 will be the most volatile year since at least 2011, when there were 35 days with gains or losses greater than 2% (21 up days and 14 down).

The volatility creates both opportunities and dangers, depending on how you react. I’m going to offer a few suggestions and point out things to watch for. Before I do, I want to share what I consider to be the most important point: If you’re feeling nervous about the volatility, the headlines, politics or anything else, don’t alter your portfolio. Rather, disengage (including ignoring news and not looking at your portfolio) until you get back into a calmer mood. You’ll make more rational decisions by doing so.

Here are some suggestions given the market’s volatility:

Roth IRA Conversions—If you have been thinking about or are intending to make a Roth IRA conversion, take advantage of the down days. The IRS only cares about the dollar amount converted, not the number of shares. So down markets can give you the opportunity to move more shares of a stock or fund (e.g., 110 shares instead of 100 shares) to a Roth IRA for the same dollar amount you will have to report on your taxes.

Think in Terms of Time Horizons—Money you don’t need for at least seven to 10 years should be allocated to stocks. You have more than enough time to ride out any volatility. On the other hand, money you need within the next few years should be allocated to cash. This cash bucket not only reduces the odds of having to sell stocks during a downturn, it can also give you peace of mind. Knowing your shorter-term needs are covered can give you the confidence to handle more volatility with your long-term investments.

Buy the Dips—CFRA Research’s chief investment strategist Sam Stovall found buying stocks during each 7% decline threshold in the S&P 500 (7%, 14%, etc.) can be a profitable strategy. In fact, he thinks an investor who followed such a strategy in the past “would have looked like a terrific market timer.”

Be Careful If You’re Using the 200-Day Moving Average—One portfolio strategy is to stay allocated to stocks when the S&P 500 (or a related benchmark) is above the 200-day moving average and to reduce the allocation when the index is below this long-term trend line. On Tuesday, the S&P 500 traded below its 200-day moving average. While strict adherents to the strategy may have viewed this as a reason to sell, a buy signal would have been generated following Wednesday’s close. In his book, “Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies” (fifth edition, McGraw-Hill, 2013), Jeremy Siegel suggested using a 1% band before buying and selling. This, he says, will result in fewer transactions. At current levels, the lower 1% band is approximately at 2,570—a level that the S&P 500 has yet to close below so far this year.

Downplay or Outright Ignore Forecasts—Lots of prognosticators are going to give advice about what to do. Relatively few will admit to lacking confidence in their predictions. Yet, a big part of the volatility is that market participants don’t know how trade policy will actually change and what new/revised tariffs will be implemented—much less their actual impact on the economy and earnings.

Ignore the Volatility—The constant focus on what the market did today has nothing to do with investors’ long-term goals. If you don’t need the money over the short term, then what happens over the short term shouldn’t matter as long as you end up where you need to be over the long term. Will there be adjustments to make along the way? Certainly, but they should be driven by your strategy and/or changes in your personal situation (age, lifecycle events, etc.) not whether Mr. Market is in a good or bad mood on a given day.

Have a Process and Follow It—Few things can keep you more disciplined than having a set list of rules and routinely following them. A written set of rules takes the emotion out of your decisions and helps you make more consistent, disciplined decisions.