Welcome to “Ask an Advisor,” a new series in which financial professionals answer pressing questions about topics relevant to investors’ personal financial lives and future goals. We’re kicking off the first installment of the series with a timely topic for today’s news climate: staying disciplined and focused on a long-term investment strategy in the face of economic and geopolitical uncertainty. Scroll down to read more.
Q: Every day, there seems to be breaking news about sweeping reforms in health care and the tax code, international conflict or Fed decisions about interest rates. The constant changes and uncertainty are anxiety-inducing, to say the least. Shouldn’t we change our portfolio strategy now, before potential events take shape?
A: There always have been and always will be uncomfortable uncertainties facing the financial markets, from a variety of potential directions (economic, political, international and environmental to name just a few). Any investor can have legitimate worries about “something” happening, which could mean bad news for the near-term value of their investments.
However, it is helpful to remember that any one investor paying attention to those uncertainties is not alone. Market participants already incorporate a chance of certain “bad events” occurring into current prices, as well as any number of other possibilities.
Therefore, market participants, as a whole, have already priced into today’s values the estimated impact of the possibility of certain events occurring in the future. It is an imperfect valuation, to be sure; but it means that changing your portfolio before “the thing” happens may not mean you’ll avoid the financial impact of that potential future event — unless you are truly pondering a likelihood which other investors have not considered. More often than not, speculating and shifting to meet the unpredictable ebbs and flows of the markets can lead to a frustrating investment experience.
At the end of the day, no one can see what the future holds.
If you are nervous about the investment markets, you may believe that your future reaction to a temporary stock market pull-back will be to dramatically reduce your stock holdings. If that’s the case, then it may make sense to discuss with your advisor now whether to adjust your long-term strategy. However, it will be important to understand how this will impact your financial plan and long-term projections.
But your best defense against uncertainty is usually to stick with your overall strategy (with small adjustments, as warranted); abide by time-tested principles, such as broad diversification and tax and cost efficiency; and stay focused on the long-term goals that drive your financial and investment plans forward.