Question your allocation to deal with recent stock market volatility

The summer stock market doldrums have morphed into a high octane volatile zig-zag. So I ask you – what is new? Haven’t we been here before? The trouble is that we just haven’t had a serious market correction since July-August 2011 and many moons before that. We have forgotten that markets go down and up, but deep in the recesses of our minds, we remember the pain of the deep market decline of 2008-2009. That is why recent headlines have scared us.

Readers who have followed my articles over the years may recall my comments about “the big mistake.” It is the sudden, emotional unobjective reaction to unexpected market volatility and the knee-jerk decision to sell into a down market thus turning a decline into a loss. It is a naturally human “buy-high, sell-low” pattern that unfortunately repeats itself in the minds of many investors.

Avoid the big mistake

Are you tempted to sell it all and go to cash awaiting the end of the ISIS threat, Ebola pandemic or the Europe/China recessions? If so, then you would not be alone as recent headlines seem just as scary as those we have survived before – the financial collapse of 2008, the tech bust of 2000, the Russian currency and long-term capital traumas of the 1990s, and the market crash of 1987. It is difficult to stay objective when we are bombarded daily with the everywhere and all-the-time sensationalism (mainly bad news) of the news that the media loves to blast our way. To avoid making “the big mistake,” investors needs to turn off the noise, just like turning off the television, when their favorite team is getting decimated.

I know that is easy to say and tough to follow. I fall victim to it myself. So what can investors do now to ease the anxiety building up daily as we witness the market swings of 100 points, 200 points and even 460 points?

Think about it this way. If your overall portfolio were entirely in cash equivalents when the markets teeter, you would probably feel good. Likewise, if you were 100% in stocks (or equity mutual funds or exchange-traded funds), then you would might be panicked, or at a minimum lose sleep deciding what to do. Somewhere between 0% and 100% equity exposure is an allocation to equities that would leave you unaffected by the kind of volatility we have recently experienced. Decide what they number is. It may depend on your station in life, but try to come up with what allows you to feel comfortable.

Question your allocation

Once you have your number, what is your overall allocation to stocks/equities now? Let’s say you are at 65%. Then you may want to re-allocate down to 50% instead of panicking and selling off all your equities. I do not recommend selling into a decline, but the volatility we have recently witnessed has merely wiped out most gains for 2014, depending on overall portfolio allocation. If you are losing sleep and are ready to cash out, and you realize that re-allocating downward to your desired number may prevent that amount you take from equities from rebounding when the equity markets indeed rebound, then that may be an acceptable trade-off. You may want to keep the change in allocation to no more than 10% to 15%.

The above is not a cure-all solution for everyone as selling into a market decline rarely works. But if recent volatility has you emotionally concerned, then you need to question your allocation to equities going forward. Maybe you need the help of a competent, experienced, objective, unemotional financial planner or investment advisor to shepherd you times like these. Think about it.

Ken Rudzinski, CFP, CLU, ChFC, CRPC, CASL, CAP, a partner in the financial planning firm Heritage Financial Consultants, is a registered representative and investment advisor representative with Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor. Rudzinski offers insurance through Lincoln affiliates and other companies. This information should not be construed as legal or tax advice. You may want to consult a legal or tax advisor regarding this material as it relates to your personal circumstances. Ken Rudzinski, CFP, CLU, ChFC, CRPC, CASL, CAP, a partner in the financial planning firm Heritage Financial Consultants, is a registered representative and investment advisor representative with Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor. Rudzinski offers insurance through Lincoln affiliates and other companies. This information should not be construed as legal or tax advice. You may want to consult a legal or tax advisor regarding this material as it relates to your personal circumstances. CRN-1034297-101314. Questions can be emailed to Kenneth.Rudzinski@LFG.com. He can be reached at Heritage Financial Consultants LLC, 2036 Foulk Rd., Suite 104, Wilmington, DE 19810; 302-529-1264.