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Smart Coping Strategies for Volatile Markets

Here's some advice for those tempted to tinker with their portfolios during times of market turbulence.

Christine Benz: Hi, I'm Christine Benz for Morningstar. Market volatility has picked up in recent days, and it might be tempting to peek at your portfolio or even make some changes. Joining me to share some thoughts about how to approach market volatility is Ben Johnson. He's Morningstar's global director of ETF research. Ben, thank you so much for being here.

Ben Johnson: Thanks for having me, Christine.

Benz: Ben, let's talk about what investors should do in these periods of market turbulence. We certainly had one at the beginning of 2020. How should investors deal with that and cope with that psychologically?

Johnson: I think what investors would be best served to do is to sit down and just jot down a short list of those things that they can actually control when it comes to their investment outcomes, and anything having to do with what's going on in the world and what's going on in the markets lie well far outside of their sphere of control. They have no influence. There's nothing that we can do really to change what's going on in the world in the immediate term and what that means for the markets and the impact, ultimately, on our portfolios. What can we control?

I think, first and foremost, among those items is our own behavior. I personally think that one of the best things that you can do during volatile market moments is just try to tune out, to take a deep breath, step away from your television, your computer, put down the newspaper, and go for a walk around the block. Get outside and realize that everything around you is there after a long period of growth. Right? You look at the trees in your parkway. They didn't get to be 50 feet tall over five short months, which is, as it should so happen, the period that if you were an investor in the Vanguard Balanced fund was how long it went from mid-February to a 20% drawdown subsequently, back to break-even by that point in mid-July. You didn't even have to take a Rip Van Winkle-like nap earlier this year during all the chaos that we were living through to wake up and find that the impact on your portfolio had been effectively nothing.

I think that case in point proves my point, which is it's important to just tune out. To understand that the market is going to experience volatility, but over the long term, as long as the world continues to be a better place, continues to progress, economies continue to grow and earnings grow as a result, that your portfolio will grow in tandem. There's going to be volatility, but that's part and parcel. That's the price of admission, the price you pay for long-term growth in your investment portfolio.

Benz: Say I'm someone who is really determined to do something, though, if the market volatility is making me really uncomfortable, and I just can't resist the urge to do some tinkering. Are there any less-bad things to do at this time?

Johnson: Well, there are less-bad things you can do, absolutely. You can focus on some of the finer things, like expenses. right? What are the fees that you're paying for the funds that you own in your portfolio? What are the expenses you're paying for advice, if you're engaging the services of an advisor? How tax-efficient is your portfolio? Are there areas where, either by virtue of tax location or investing in different types of asset classes--by investing in different types of funds, ETFs over mutual funds, the former tending to be more tax-efficient--how can I save more for myself to compound between now and the long term, and give less to Uncle Sam in the interim? Those are areas I think where investors can pay some attention.

They can also use these moments to revisit their asset allocation, their mix between stocks, bonds, and other things, and whether or not that's really appropriate given where they're at in their life cycle as an investor, given their appetite for risk, which is always evolving, is always in flux. The more you're looking at the markets on a day-in and day-out basis, probably the less good of an idea you have around your appetite for risk, your ability to take risks. I think it also points back to the importance of just tuning out, because your risk meter is going to fluctuate with every headline you read, every time you see flashing red lights on CNBC in that intro that says markets are in turmoil. Markets are always in turmoil, it's just the turmoil that flashes red doesn't feel nearly as good as the turmoil that flashes green and boosts your portfolio's value, which is directionally where things trend over the long term. It's about tuning out that noise, focusing on the long term signal, and again, refocusing on those things that you can actually control.

Benz: Well, following up on the point that we have had a really great recovery since the market trouble in the first quarter of 2020, let's talk about people who are getting close to retirement and maybe haven't revisited their portfolio's risk exposures recently. Is it a good time for them to do that?

Johnson: It's absolutely a good time to do that, especially because we've seen a pretty dramatic runup in equity markets, which in some cases had recently retouched all-time high levels. If near-retirees are to revisit their allocations, they might be a little bit long equity risk. Now, we're in an unfortunate set of circumstances right now where the alternatives are few and far between and generally unattractive, especially if you look at fixed-income securities. With yields at or near all-time lows, the 10-year Treasury in real terms basically being in negative territory, investors are probably going to have to hold their nose pretty tight to feel comfortable reallocating away from equities and toward bonds.

Now, that said, there are still important benefits to do so, even if the prospective returns look atrocious, candidly, just in terms of having that ballast in your portfolio, having that buffer to absorb more equity risk, and ultimately to be able to rebalance back toward equities at appropriate moments in time. Revisit those asset allocations, know full well that the alternatives, again, don't look great, but reground oneself in the benefits of diversification over a longer period of time.

Benz: That's great advice for volatile times. Thank you so much for being here, Ben.

Johnson: Thanks again for having me, Christine.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.