Rising interest rates and the specter of a trade war are increasing volatility in the stock market, causing a corresponding surge of anxiety among some investors.
There’s no need to lose sleep. It’s a mistake to assume volatility is necessarily negative, or to try to wait it out. Better to get used to a more volatile investing environment, because it isn’t going away. In fact, though low volatility may make some investors feel more secure, it’s actually a sign that the system isn’t working as it should.
A little history. For the past few years there has been very little volatility in financial markets because the Federal Reserve kept interest rates artificially low. That anesthetized the markets. As a result, all stocks, good and bad, went up in lockstep. In a less constrained market, well-managed companies with good products are rewarded, while companies that are poorly managed or producing inferior products are penalized by their stock decreasing in value.
Since the Federal Reserve began raising the benchmark interest rate earlier this year, however, volatility has come rushing back. The market is now reacting to this new rising interest rate environment, as a healthy market should. And this creates new opportunities for investors.
In times of low volatility, passive investments tend to outperform, and because it’s just a pool of money tracking a specific index or basket of stocks or bonds, there is less need for reliance on an astute manager. Passive investments are more successful when focused on very efficient parts of the market, such as the S&P 500 Index. In other words, passive investments will never outperform the market.
In a volatile market, informed active investments will trump passive investment. Why? While it’s hard for good companies to stand out in a low-volatility environment, in times of market turbulence, they will shine. So while investors tend to fear that volatility leaves them unprotected, we see it as an opportunity to identify funds for client investments that are less volatile than their benchmarks.
People in this country tend to think of the stock market and the S&P 500 as synonymous. Sure, the more efficient, giant companies are listed in the S&P. But the stock market is a very big place with many hidden corners. It includes niches that are not quite as followed as the S&P such as small-cap, international and emerging markets that are currently outperforming market indices. This additional diversification can lower the overall volatility of a portfolio.
Every client is different. Some want very little exposure in the stock market. After all, not everyone has the stomach for a 700-point drop in the market. Others are aggressive and don’t want any bonds in their portfolios. At Singer Xenos Schechter Sosler Wealth Management, we have a foothold in all markets so that we can best match our clients’ preferences with real market intelligence, and help them exceed expectations as we work together to achieve their financial goals.