Why are the investment markets so volatile?

Most investors get a little nervous when asset values for stocks, bonds, mutual funds and other investments yo-yo up and down. And if you own a business, having some of your business’ pension fund invested in what might appear to be volatile investments can be discouraging.

The investment markets can swing up and down for many reasons:

The economy: Disappointing economic reports can, for example, cast doubts about the strength of the economy, and a sell-off occurs.

News: Sometimes, geopolitical news and events taking place in certain countries or regions can impact how the markets trade.

Status quo: Markets normally ebb and flow positively and negatively.

Momentum: Some investors may sell shares of an asset to lock in profits. That may trigger additional momentum selling. Then, as prices dip, momentum buying sprees can occur. The markets then climb back upward.

Nobody can predict the direction of the markets. So, I advise clients to set up a plan that helps balance their long-term goals with their tolerance for risk. If you get a strong feeling of nervousness with each market gyration, this may mean you’re taking on too much risk. Is there a way to even out portfolio gyrations? Sure. Several strategies can do just that.

Many advisors recommend a simple rule: no single stock represent more than 10% of an investable asset base. Some say no more than 5%. If one stock or one asset class exceeds that minimum threshold, you may need a change. Doing so may help lower your risk and help you sleep just a little bit better.

Stay the course. It’s generally good to stay the course with your investments, rather than make hasty decisions. I’ve been in financial planning for decades, so I have some perspective here. Meet with your advisor to review your situation. We can evaluate your investment program and assess tax implications before reallocating any large investment stakes.