By Aadil Zaman and Syed Nishat
Senior Vice President of Wall Street Alliance Group
The recent stock market fluctuation made the headlines partly because we haven’t had a meaningful pullback in quite some time. Here are Aadil Zaman and Syed Nishat of Wall Street Alliance Group’s top 5 tips that they have used to help clients successfully navigate through market volatility:
1. Be mentally prepared for market declines. Market corrections are an essential part of a healthy market. At any point in time an investor should be prepared for a 10% to 20% pullback. If the recent 2 days fall made some investors feel restless and stressed, then it may be time to reassess their risk exposure to make it more conservative. On the other hand, corrections present an opportunity for those investors who are sitting on a large amount of cash to identify entry points in the market to put their money to work.
2. Factor in rising interest rates. Recent data has shown that the economy is improving with unemployment falling and GDP growth increasing which will eventually lead to inflation pressures. One of the responsibilities of the Federal Reserve is to control inflation and this is accomplished by raising interest rates. As the market adjusts to the realization of higher interest rates it may fluctuate. It is therefore essential while designing an investment strategy to take higher future interest rates into consideration.
3. Watch the municipal bond market. Volatility could cause a short-term fall in the municipal bond market which may create an opportunity for investors who are in a higher tax bracket. Consider that a yield to maturity of 3.5% per year on a high grade insured municipal bond which is trading at par is equivalent to making a 5.83% per year after tax return for someone who is in the 40% tax bracket and that too with very low risk.
4. Stay away from leveraged ETFs. Leveraged ETFs are bad news for the individual investor. These are complexed products that are often misunderstood and could cause market volatility as well as distortions.
5. Identify your worst-case scenario. This is an important exercise for investors, so they can understand their pain threshold. At present, the likelihood of a market decline to the extent of what happened in 2008 are low, however, one should always ask, “What if 2008 happens again?” Understanding this worst-case scenario will help investors stay calmer and have an investment approach that is closely aligned with their individual level of risk tolerance.
With greater participation in the stock market through machine trading, ETFs and robo advisors, volatility is here to stay. For this reason, it is important for investors to take into account a high degree of market fluctuation in their portfolio design.●
The opinions and forecasts expressed may not actually come to pass. This information is subject to change at any time, based on the market, the political environment, and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.
Securities offered through Securities America, Inc., member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Wall Street Alliance Group and Securities America are separate companies.