Date: January 4, 2021

Investing in Volatile Markets: Heritage Capital Addresses Concerns

Market volatility is constant, yet it’s common for investors to forget during strong bull markets. We all got a reminder in 2020.

With a new year upon us, investors are now asking: What if another 2020 happens? How do long-term investors prepare for volatility?

As founder and president of Heritage Capital, I’ve been helping investors since 1988. Volatility fluctuates over time, providing opportunities and challenges for investors who tend to feel more uncertain during highly volatile markets. It is like an alligator’s mouth that opens very slowly and clamps down in the blink of an eye. You can take several steps now to prepare for volatility; steps that can help your investments prosper in the long run.

Here are a few:


Diversify Your Portfolio Among Strategies Over Assets

Diversification only works to the extent that elements within your portfolio have uncorrelated returns. That means not all of your investments go up and down together like a dancing duo in sync. Ideally, different portions of your portfolio will have zero or negative correlation with respect to one another. Research shows that portfolios containing elements with zero correlation reduced risk (as measured by volatility) sufficiently.

Some people are accustomed to “swinging for the fences” when it comes to investing. It’s your money, so it’s natural to take an offensive approach. And with more than 12 years of rising equity markets behind us, that behavior has been well-rewarded, although the Corona Crash in March certainly gave many investors a strong scare. However, it is important to remember that the stock market is cyclical. As we saw in 2020, periods of over-performance are usually followed by periods of lower returns. The change can happen at any time, although there are usually warning signs.

We’ve seen this before: People jump on a trend long after it has been recognized by the masses and most end up losing. Why does this happen over and over again? Because people forget (or don’t know) that along with playing offense, you need to play defense, to help avoid losses. One of those strategies is diversification. Ask anyone who was overinvested in technology at the end of the Dotcom run, or in stocks during the 2008 financial crisis.

The problem for DIY investors is that today’s extremely efficient electronic markets are highly correlated. It can be a huge benefit to work with a financial advisor who understands how the market really works.


Let’s talk. Contact Heritage Capital to see how we can help you prepare for the future.


Stay Focused on Your Long-Term Goals

There is often a temptation to make a quick “score” in the market, whether on the upside or downside. Trading assets in this way involves an element of good timing, which by definition can be very difficult for the individual investor. Unless you have illegal inside information, it’s hard for the vast majority of investors to consistently profit from short-term investing. The harm to your portfolio can be substantial when you get the timing wrong. More importantly, opportunistic short-term trading diverts assets from a sound long-term investment plan.

When you are saving and investing for retirement, you are making a bet on the long-term growth of your portfolio, characterized by allocating assets over a wide range of diversified, low-correlation investments and strategies that each have a distinguishing rate-of-return. If you want to maximize your chances for a comfortable retirement, you will fully fund your retirement investments and separately fund any short-term “mad money” that you can afford to lose. Or use that same money for a nice trip to Las Vegas where you can lose it more efficiently!


Understand the Impact of Volatility

Higher volatility is the price you pay for higher returns. The younger you are, the more volatility you can likely tolerate, because you have more time to recover from down markets and investing mistakes than, say, someone who is a few years from retirement and therefore, ready to live off of these investments.

As you get older, you may find yourself more concerned about market volatility. Some of this concern is legitimate and should be evidenced by a slow reallocation to less-volatile asset classes. Unfortunately, too many investors in their 50s and 60s overreact to volatility, reducing portfolio risk to such an extent that it cripples prospects for staying ahead of inflation. Too much timidity might result in you outliving your money.


Control Your Emotions

Frequently veering your investment strategy from aggressive to defensive and back again often is the result of panic – either the panic of missing out on lucrative investments or the panic of watching your portfolio value crater. Unfortunately, emotional trading can magnify errors in timing while needlessly costing you extra fees and taxes.

If only we were all robots devoid of emotion! Then we would be able to withstand sharp market movements. But if you invest on your own, your ability to resist emotional trading is highly dependent upon your personality. Sure, you might use investment tools that give you dispassionate buys and sell, but even then, your ability to maintain your discipline may rest upon your capacity to withstand your emotions. At Heritage Capital, we see this often, when DIY investors come to us asking for help.

The unfortunate outcome is that the emotions of many DIY investors cause them to buy high and sell low. That is the opposite of a winning strategy. Emotional investing and trading increases risk because you’re adding temporal risk to market risk. By adopting and sticking to a sound, long-term investment approach, you banish temporal risk. If that approach involves properly diversified assets and strategies, you reduce market risk.


Get Educated, Not Emotional Advice, From a Fiduciary Financial Advisor

As a fiduciary financial advisor in Woodbridge, CT, sometimes my job is to protect clients from themselves. Good advisors educate their clients about the basics and finer details of long-term investing. It’s a great opportunity for investors to learn about risk/reward tradeoffs; the impact of taxes, fees and commissions; the differences between effective and ineffective diversification; and the harm caused by emotional attempts to trade the market.

When looking for a fiduciary financial advisor to work with, make sure he or she is highly trained and has extensive experience dealing with many investment vehicles and asset classes. One of my most important jobs as a financial advisor is to keep my clients’ emotions in check – keeping their eyes on the ultimate goal. A fiduciary financial advisor can help you work out a retirement investment plan based upon your unique circumstances and preferences. (Read our recent blog post: How to Tell a Good Financial Advisor from a Bad One.)

In addition, your advisor should help you with the many technical aspects of long-term investing. These include what types vehicles to invest in, which funds have the best track records and fund managers, how to maximize tax-advantaged investing for retirement and how to use hedging techniques to tame volatility, to name a few.

Remember, your retirement plan is part of your overall wealth plan, all parts of which must be structured to mesh with the other plan elements. Think of your relationship with your financial advisor as an opportunity to access the best information and advice available to investors who don’t sit on corporate boards and aren’t senators trading on inside information.

If you’re currently looking for a fiduciary financial advisor in the Connecticut area, contact the team at Heritage Capital. We offer a unique way to try us out with no obligation. A simple conversation can go a long way.


Heritage Capital eBook




Paul Schatz, President, Heritage Capital