Hedge
Funds and Market Volatility
It has recently been reported
that hedge funds now account for half of the daily volume on the New York Stock
Exchange. This is certainly
contributing to the recent market volatility and once again, the increased
market volatility is beginning to make people nervous. This is quite understandable when the
market drops 5% in two days and 3.5% in one day, as it did in July and August
respectively.
We know that people are nervous,
because we have gotten a few phone calls and emails from clients asking if
there is something they should be doing.
Our advice, as usual, is to stay focused on the long term and not let
the short term volatility disrupt your overall investment strategy. We realize, however, that’s a lot easier
said than done. So let’s
explore the steps you can take if you do become a little too nervous.
Option 1 - Move
everything to cash, wait for the market to settle down and then move back to
your more aggressive positions when you feel the market is going to be less
volatile. This is called “market
timing” and is not something we recommend. We don’t know of anyone that has
been able to time the market successfully over a long period of time; plus it
requires making two correct decisions in a row. The first decision,
when to exit the market and the second decision, when to re-enter the market. Any one wrong decision and you will get
what we call “whipsawed”, resulting in a real loss.
Option 2 – Reassess your asset allocation and become more conservatively positioned, which certainly could make sense. However, in order to lessen short term volatility, you will need to lower your expectations for long term returns. Equities (ownership of companies (stocks), real estate, precious metals, collectibles, etc.) should outperform fixed income holdings (bonds, mortgages, money market funds, CD’s, etc.) over the long term (3-5 years). Of course past performance is no guarantee of future results.
Option 3 – The
best action is to come in and talk to us.
We will review your investment strategy and you will either get
reassurance that things are fine or make some necessary adjustments.
Remember, our investment managers
look forward to market volatility and corrections because it allows them the
opportunity to find better bargains for your portfolios. So if you can put the news media and your
emotions aside and have confidence in our investment managers, then you’ll
realize that volatility and market corrections will work to your advantage in
the long run.
If this letter doesn’t make
you feel a little better, then it’s definitely time to give us a call and
set up a review.
P.S. During
turbulent times like these, insurance companies remind us that annuities can
provide some peace of mind through the guarantees they offer. As you may know, annuities are very
complex insurance contracts. We only
recommend annuities when the client’s situation and goals dictate that an
annuity is appropriate for them. If
you would like to know more about how annuities work and see some of the
guarantees they can offer, just give us a call.
Securities
through KMS Financial Services Inc.
520.884.7550
jpw@financial-architects.com
3971 E. Paradise Falls,