The stock market is not meant for the faint of heart. This has been evidenced by the panicked selling caused by recent volatility as the market retreats from all-time highs. If one only read headlines, the thought of another market recession seems imminent, but it is important to put the recent correction in perspective. It is even more important to not overreact to the markets in times that can only be described as emotional. While I do not recommend doing a complete rebalance mid-correction, the reality is, corrections have happened more often than not recently. As a result, here is a how-to guide to blunt volatility in the future.
During a cyclical bull market, it is easy to get caught up in the ever-growing balance of your portfolio. It is hard for some investors to sell their winners when the going is good. However, this is critical. If you buy a position and it grows from 2% to 4% of your portfolio, you should consider locking in some profits and getting the allocation back down to where you are comfortable. This is prudent investing. No one will ever consistently time the highs and lows. Instead of playing the speculation game, think in percentages. That is to say, keep an investment’s allocation in line with something you are comfortable with.
Cash is its own asset class. What has happened to our clients’ cash positions during this correction? It has not gone down in value, and it is waiting to buy some beaten down positions that we like. It is always important to have some cash in your portfolio. Your allocation should depend on your unique situation. When a correction has not happened in a while, use history on your side and start adding to your cash position. Larger cash positions are key to investing in a volatile market.
For those of you that watch Kevin O’Leary on “Shark Tank,” you know that he loves investing in companies that produce a steady flow of income. When money leaves the stock market, as it does in a correction, and then re-enters the stock market, where does it typically go first? Into companies that are deemed safest; these tend to be companies that pay dividends. Ideally, you want to look for companies that are increasing their dividends.
Volatility is here to stay. As this bull market continues, making money will prove to be a more arduous task –but here at Gerber Kawasaki we are up to the task. It is important to stick to a strategy and be disciplined. Those that stay disciplined tend to perform well over time. Do not fixate on the news and do not try making predictions when the volatility will end. Instead, for those long-term investors, look at the volatility and this recent correction as an opportunity.
By Zachary Bainter
Investment Advisor Representative
Gerber Kawasaki Inc.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss.
Gerber Kawasaki, 2716 Ocean Park Blvd. #2022 Santa Monica, CA 90405. Contact us at (310) 441-9393.