Managing Market Volatility with Joey Khoury | Mission Wealth

this video is part of a series that applies psychology to financial planning so we can all make wealthier decisions as a multi-billion dollar investment planning firm Mission wealth is able to give you the collective wisdom and real life examples from thousands of multi-millionaires and families every quarter we publish one to three psychological topics that are relevant for current markets risk perception and financial decisions last quarter we distilled everything you need to know about markets during presidential election years in just under 10 minutes and the theme of this quarter’s discussion is dealing with Market volatility first and foremost how do people feel out there the consumer sentiment index measures how consumers feel about the current state of the economy personal finances business conditions and buying conditions the current index measures in at 68 and to put that number in context at the worst of 2008 the index scored 55 and at the worst of the pandemic scored 72 so people currently feel worse than they did in April of 2020 but not as bad as they did in 2008 and at the heart of

this sentiment are riseing cost of living political divide Market gations the presidential election and some distrust that the soaring all-time high values on Wall Street may not match the reality on Main Street as an investor two Central questions come up one are markets truly more risky now or are we just more fearful today and two what is a proactive action plan for when markets are volatile let’s first understand what is considered normal Market volatility this Baseline will ground you against fear inducing headlines during normal market conditions the market averages a negative 5% pullback three times a year a negative 10% pullback once a year a negative 15% pullback every 3 years and about a negative 20% pullback every six years or so despite these normal draw Downs the S&P has averaged about 10% annual return for the prior 30 years however as any investor knows this does not mean it meant it earned 10% each and every year the emotional difficulty of being invested in the market is that it is completely normal for the S&P 500 to range between positive 45 to 25% in any given calendar year and sure the larger

positive side will average higher returns over time but only if you have the wherewithal to stay invested during the low points a good example of this volatility this year was from Tuesday July 16th to Monday August 5th when the S&P lost 8 1 half% value and this is squarely in line with the above metrics of an average 10% pullback once a year but during that decline many investors panicked that the bubble had bursted and suddenly considered making major allocation decisions despite the 8 and half% drop being part for the course so what’s your action plan for when there is Market volatility the acronym darts DTS covers the most important Concepts and action steps to take when markets move let’s start with diversification the D and dart stands for diversify which is almost an overused word most investors know not to put all their eggs in one back basket but diversification also applies to sectors and subcategories instead of just buying the US Stock Market such as the S&P 500 talk to your adviser about the pros and cons of including other growth markets such as International stocks private Equity Real Estate and

infrastructure Investments the same can be said for bonds instead of treasuries now called T Bill and chill talk with your adviser about the benefits of capitalizing on elevated interest rates in corporate bonds municipal taxfree bonds and private credit and lastly if you have a large portion of your portfolio in one or a few positions consider three routes one a measured divesture with limit order sales or covered call options two non-t taxable protection with Costless callers or exchange funds and three charitable strategies such as a donor advice fund or charitable trusts the a in darts stands for allocate the largest factor which determines your rate of return and volatility is the ratio of growth Investments stocks private Equity Real Estate infrastructure to income Investments like bonds private credit and structured contracts this ratio will explain where approximately 92% of your investment Returns come from the specific funds you choose your timing and fees combined make up less than one tenth of where you get your returns from the reason you focus on allocation first is to design a portfolio that supports

the withdrawals or growth needed and for the zigging and zagging of the values to be comfortable enough for you to not lose sleep over normal Generations the general principle is that growth-based Investments offer a larger returns over time but tend to Zig and zag a lot more than income based Investments you can reduce the zigging and zagging volatility Risk by adding income based Investments which offer more stability but less long-term returns our planning process can identify your optimal blend of growth to income Investments tailored to your exact Financial life and cash flow needs a source for comfort for many investors would be to create a portfolio where the income-based Investments can cover your daily living expenses the letter r in darts stands for two concepts that coincide range and rebalancing range is the normal volatility zigging and zagging that you can expect for your given investment allocation and this varies based on how you are invested for example the normal range of the S&P 500 in any given year is between posi 43 to -23 and by investing in different markets you can

reduce the volatility and narrow the range of normal movement to a desirable level in the chart below you can see some sample ranges for portfolios invested in public markets on the vertical is the normal range of returns in any given calendar year and on the horizontal are different portfolios to the left you can see a portfolio with 100% invested in the bond market noted zero hyphen 100 and to the right you can see a portfolio invested 100% in the stock market noted 100 hype and zero in between our different blends of portfolios such as a 60% stock 40% Bond portfolio noted 6040 this chart gives you a sense of what is considered normal range defined as two standard deviations and the best or worst case range defined as three standard deviations in reality investing is a lot more complicated than picking between two types of Investments like stocks and bonds and your advisor should chat about the many other types of Investments that can be factored in to achieve your normal range of movement and Target rate return working with a professional adviser and investment manager can potentially help reduce risk

and improve returns by including more sophisticated Investments such as private Equity Real Estate private credit infrastructure and more the key is to know what your normal range of movement is and whether or not you’re comfortable with that normal range of movement take one last look at the positive range versus the negative range they are nearly twice as high as the negative ranges are low this is why performance averages positively over several years yes some years may be negative but history shows that markets are positive about 73% of the time and negative about 27% of the time those are good odds the second meaning for the letter r in Dart stands for rebalance which we have a separate article on which we’ll Link in this right up imagine you’re walking in a town and your favorite store has a sign out front that reads everything inside 30% more expensive sale ends tomorrow would you go in of course not however if the sign read the opposite everything inside 30% off sale ends tomorrow you’d Rush inside investors tend to do the opp opposite of what we all know is common knowledge

they chase performance buying when everything is more expensive and they sell when markets are down missing purchasing opportunities when there’s a big discount rebalancing solves this it is the process of selling what has successfully appreciated to purchase what has lowered to attractive prices all while maintaining Target allocations to control for risk and maintain your range of normal Movement we know the best way to control for risk is to control the overall allocation see our separate article for rebalancing for more detailed information the T in darts refers to tax more specifically tax locating and tax L harvesting we also have separate videos and articles on these topics but in short they can be summarized as follows tax locating is the process of placing different types of investments in the most efficient account types in tax deferred accounts like IAS 401ks and profit sharing plans it makes the most sense to place income based Investments within those this shelters the income tax when earned because these accounts only pay tax upon withdrawals the income is able to grow and compound without

taxes being taken out each year while on the otherand in tax-free or capital gains accounts such as Roth joint trust accounts it makes more sense to have the highest growth Investments these are the Investments you will keep the most of because they have the least amount of tax to pay and similarly tax loss harvesting is the process of intentionally selling what has lost value to capture the loss this is a write off on your your taxes allowing you to offset it with capital gains by selling what has gone down you can collect the tax write off and repurchase similar Investments to participate in the recovery an example would be owning Coca-Cola and selling it when it goes down to buy Pepsi you fully participate in the market but collect losses along every dip to help offset taxable gains you can see our full explanation of tax loss harvesting under our insights blun the final letter in darts stands for scope which is meant to remind in investors of the long-term approach the market does not operate on our arbitrary 12-month calendar and neither should you look at your Investments That Way

perhaps the most valuable chart to help keep our perspective is this chart below this chart goes back 50 years to show you the best and worst returns over different timelines when looking at the prior five decades the worst one-year period was 43% from March of 2008 to February 2009 the best one-year period was positive 66% from July of 82 to June of 83 and when you take a look at the bars and you start expanding the time period something should stand out the best six-year period was from April of 94 to March of 2000 the worst six-year period was January 2000 and December 2005 notice that there was no negative time period for any returns over 12 years this information should be profound invest short-term money conservatively however money that will sustain you for many years ahead should be understood that there are much much more stability over the long term than the short term looking at your Investments on a monthly quarterly or even annual basis is good to stay informed but may not be ideal for keeping your long-term goals on track if the portfolio is over managed with too many changes in the short

term as we welcome the fourth quarter and look back on the third quarter we hope these Concepts help kept you informed about managing Market volatility when markets move downward the darts framework can be helpful to assess how your portfolio is being being managed whether or not it’s taking on more risk than normal and what steps to take when there’s a dip we hope you found these topics helpful as we enter the new year and for more detailed Market commentary I welcome you to read or watch our chief investment officer Market updates from our insights blog to submit requests for future topics please don’t hesitate to email me directly at JK ym wealth.com thanks so much take care [Music]