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Banned
Investors may be weary of the market's recent ups and downs. But with big market swings likely to continue, they would do well to learn to live with the volatility.
The whipsawed markets of recent months have rattled shareholders and shattered a lengthy period of unusual market calm. Daily price spikes like these haven't been seen in several years.
"It hits you in the gut," says author and investment consultant Peter L. Bernstein, who has observed financial markets for more than six decades. "You can't avoid being frightened by it."
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In unsettling times, the conventional investing wisdom says: Fasten your seat belt and hold on. Don't get too fancy or flustered. Since markets go up more often than not, keep a diversified portfolio of stocks and bonds and shoulder only as much risk as you can handle.
Yet sitting tight sometimes makes you a sitting duck. It is natural to cling to proven winners even as trends go against you. But unruly markets that shake the status quo can teach us to be disciplined, better investors.
This can be a hard lesson. Rising volatility is a signal that new market leadership is emerging. Managing your portfolio nowadays demands a realistic perspective and the wherewithal to make informed decisions. It calls for you to resist the pull of the past and look forward.
"Volatile markets are less forgiving," says psychiatrist Ari Kiev, an expert on stock traders' buying and selling habits. "You've got to do a lot of work."
While volatility creates opportunity, you don't necessarily need to overhaul your investment plan. More often than not, making small, tactical shifts to a properly allocated portfolio can position you for a changing market climate.
Typically, it is enough to trim past winners and use proceeds or surplus cash to add areas that haven't done as well. Let's say that emerging markets' stunning multiyear gains have lifted your initial 5% portfolio stake to 10%. Cut back your exposure to 5% and direct the proceeds to, say, large-cap U.S. growth stocks, which just this year began to assert themselves.
"Rather than be upset that volatility is up, take it as a signal to move on," says Richard Bernstein, chief investment strategist at Merrill Lynch. "Experience shows that the market leaders of one five-year period do not go on to be those of the next five-year period."
Accordingly, the strategist has been advising investors to lighten up on small-cap U.S. stocks, emerging markets, value-oriented strategies and energy and commodity plays. His forecast for a global corporate earnings slowdown steers him to shares of large, dividend-paying companies with steady earnings, plenty of cash and a multinational footprint.
Merrill's sector picks include large-cap U.S. growth stocks, including established technology companies and leading exporters; developed European markets; and defensive sectors, such as consumer staples and health care, that can also deliver solid results. You can find these types of stocks in low-cost mutual funds such as Vanguard Primecap Core and the exchange-traded fund iShares Russell 1000 Growth Index.
"The economy is slowing and there's a premium for growth and earnings," says Jim Swanson, chief investment strategist at mutual-fund giant MFS Investment Management. "The market is saying maybe value isn't the best way to invest now. Companies with growth metrics are starting to do better; I think that trend can continue for two or three years."
Indeed, the fact that stock-market leaders tend to stay popular over several years works in your favor, says Jeff Mortimer, chief investment officer of equities at Charles Schwab Investment Management. Unlike traders and investment professionals, you're under no pressure to buy or sell. Instead, you can choose entry and exit points more carefully and opportunistically, riding investment waves more fully and profitably.
"Volatility can present money-making ideas," Mr. Mortimer says. "Don't be frightened by it; use it to your advantage."
• Jonathan Burton is investments editor at MarketWatch.com. Jonathan Clements is on vacation.
Write to Jonathan Burton at jonathan.burton@dowjones.com
The whipsawed markets of recent months have rattled shareholders and shattered a lengthy period of unusual market calm. Daily price spikes like these haven't been seen in several years.
"It hits you in the gut," says author and investment consultant Peter L. Bernstein, who has observed financial markets for more than six decades. "You can't avoid being frightened by it."
[chart]
In unsettling times, the conventional investing wisdom says: Fasten your seat belt and hold on. Don't get too fancy or flustered. Since markets go up more often than not, keep a diversified portfolio of stocks and bonds and shoulder only as much risk as you can handle.
Yet sitting tight sometimes makes you a sitting duck. It is natural to cling to proven winners even as trends go against you. But unruly markets that shake the status quo can teach us to be disciplined, better investors.
This can be a hard lesson. Rising volatility is a signal that new market leadership is emerging. Managing your portfolio nowadays demands a realistic perspective and the wherewithal to make informed decisions. It calls for you to resist the pull of the past and look forward.
"Volatile markets are less forgiving," says psychiatrist Ari Kiev, an expert on stock traders' buying and selling habits. "You've got to do a lot of work."
While volatility creates opportunity, you don't necessarily need to overhaul your investment plan. More often than not, making small, tactical shifts to a properly allocated portfolio can position you for a changing market climate.
Typically, it is enough to trim past winners and use proceeds or surplus cash to add areas that haven't done as well. Let's say that emerging markets' stunning multiyear gains have lifted your initial 5% portfolio stake to 10%. Cut back your exposure to 5% and direct the proceeds to, say, large-cap U.S. growth stocks, which just this year began to assert themselves.
"Rather than be upset that volatility is up, take it as a signal to move on," says Richard Bernstein, chief investment strategist at Merrill Lynch. "Experience shows that the market leaders of one five-year period do not go on to be those of the next five-year period."
Accordingly, the strategist has been advising investors to lighten up on small-cap U.S. stocks, emerging markets, value-oriented strategies and energy and commodity plays. His forecast for a global corporate earnings slowdown steers him to shares of large, dividend-paying companies with steady earnings, plenty of cash and a multinational footprint.
Merrill's sector picks include large-cap U.S. growth stocks, including established technology companies and leading exporters; developed European markets; and defensive sectors, such as consumer staples and health care, that can also deliver solid results. You can find these types of stocks in low-cost mutual funds such as Vanguard Primecap Core and the exchange-traded fund iShares Russell 1000 Growth Index.
"The economy is slowing and there's a premium for growth and earnings," says Jim Swanson, chief investment strategist at mutual-fund giant MFS Investment Management. "The market is saying maybe value isn't the best way to invest now. Companies with growth metrics are starting to do better; I think that trend can continue for two or three years."
Indeed, the fact that stock-market leaders tend to stay popular over several years works in your favor, says Jeff Mortimer, chief investment officer of equities at Charles Schwab Investment Management. Unlike traders and investment professionals, you're under no pressure to buy or sell. Instead, you can choose entry and exit points more carefully and opportunistically, riding investment waves more fully and profitably.
"Volatility can present money-making ideas," Mr. Mortimer says. "Don't be frightened by it; use it to your advantage."
• Jonathan Burton is investments editor at MarketWatch.com. Jonathan Clements is on vacation.
Write to Jonathan Burton at jonathan.burton@dowjones.com
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