2016 was a volatile year across the global geo-political landscape and the inherently connected financial markets. Seemingly unlikely events, Brexit and the election of Trump, shook the world. 2017 too will be filled with unknowns and volatility. Here are a few tips for protecting your wealth and navigating the market’s ups and downs.
Diversify Your Investments
Diversification has always been the key to distributing and managing risks inherent in investing. What does it mean to be diversified? Let’s start with an example: Imagine a portfolio that was entirely comprised of holdings in just two stocks, Facebook (FB:NASDAQ) and Twitter (TWTR:NYSE). This is called a “concentrated” portfolio; if Facebook has a bad quarter in terms of earnings, or one of its core products like Instagram loses market share to a competitor like Snapchat, or any number of things goes wrong, our concentrated portfolio will be very sensitive to any downward move in the stock price. Beyond just owning two stocks, both Twitter and Facebook are technology sector stocks; if President Trump were to announce policy unfavorable to this sector, the portfolio would be incredibly sensitive. Alternatively, a diversified portfolio has a balanced mix of holdings across assets classes – stocks across different sectors (International, Emerging markets, Tech, Consumer, Telecom, Industrial, Energy), bonds, precious metals, real-estate, and cash. The more diverse the holdings, the less reliant a portfolio is on the success or failure of any one asset class, sector, or stock. At Catamount, we construct appropriately diversified portfolios based on the risk appetite and goals of our clients.
Over the long run, the stock market has a long-term tendency to rise – this simple fact is something to remember through the market’s day-to-day and even year-to-year volatility. The key to growing a portfolio is to stay put and patiently ride through the market’s turbulent peaks and valleys. If you can do this, you will take advantage of market’s long-term rising trend. However, studies show that most people often do the exact opposite and instead of staying put they can’t resist the natural urge sell their positions during market corrections, set-backs, and crashes. These people are in effect buying high and selling low, or buying low and selling low, when the ultimate goal is to buy low and sell high. In fact, a market correction often presents a great opportunity to be investing in the stock market instead of selling. This idea is summarized well in this tweet from macro-investor Cullen Roche:
Do you have a 360 degree all-encompassing view of your assets? Are they are working cohesively under the same risk parameters and growth thesis? We often come across potential clients and clients who are working with several different wealth advisors, tax-advisors, or estate-planners. This can lead to a redundancy in positions, unnecessary fees, and a confluence of different philosophies, yielding a less effective approach to growing and protecting wealth. One of the first things we advocate across our clients is a consolidated and simplified approach. At a minimum, it is important to make sure that there is communication between different moving parts so that you have a well-defined and universal approach to market volatility and market corrections.