In the past few weeks, markets have experienced significant volatility, leaving many investors feeling uneasy about their portfolios. Partly to blame was an unexpectedly weak number of new jobs created and the unravelling of the so-called Japanese “Yen Carry Trade”.
Should You be Worried?
While no one can predict what the market will do, volatility comes with the investment game. It’s times like these that investors need to sit back, take a deep breathe and take a good hard look at how they are investing. Ask yourself these questions:
- Am I taking on too much risk?
- Is my portfolio sufficiently diversified based on my goals?
- What’s my next move?
Am I Taking on too Much Risk?
First of all, we need to define what “risky assets” are. Risky is a relative term, so for the sake of this argument, let’s group the following investments in the risky category:
- Crypto/Crypto ETF’s
- Meme Stocks
- Stock Options
As an intermediate level trader, I limit my total exposure to the aforementioned risky assets to 5 percent of my portfolio or less. To me, a total loss of 5 percent is enough to give me a stern slap across the knuckles, but not enough to cause irreparable harm to my total investment. If you’re an investing novice, I would advise staying away from all the previously mentioned risky assets and instead stick to Stock and Bond ETFs.
If you find that your “risky” investments make up a significant portion of your portfolio, it may be a good time to think about diversification.
Is My Portfolio Sufficiently Diversified?
While this question largely depends on your individual risk appetite, you can use the 100 minus age rule as a handy guideline for overall stock exposure based on your age. This rule is based on the 60/40 stock to bonds allocation theory that some investors may look at as out of date for the current age of investing. However, just because the theory may be a bit outdated, that doesn’t mean it’s bad advice. Basically stated, you will subtract your current age by 100. The resulting number is the recommended percentage of your portfolio that should be invested in stocks. For example, a 60 year old investor would have approximately 40 percent of their investments in stocks and the rest in bonds.
What’s My Next Move?
Between July 18th and August 5th, the SPDR (S&P 500 ETF) suffered a 9 percent drop in value. If your overall losses during that timeframe were significantly worse, then I think we can agree that your portfolio is in need of diversification. A move to ETFs over individual stocks or a higher percentage of your portfolio in bonds could make a difference. Most online brokers have investment specialists available to help you decide what’s the best move for you to better protect your investments from market volatility.
While market volatility can be unsettling, it doesn’t have to derail your investment strategy. By embracing diversification you can protect your portfolio from the worst effects of market swings. Remember, the key to successful investing is staying the course and making informed decisions, even when the market seems uncertain.
