Stay the Course and Stick with the Plan

Volatility like that experienced in equity markets yesterday unnerves us, to say the least. An almost 120-point swing (2.9%) in the S&P 500 occurred over the course of the morning and very early afternoon. If that wasn’t enough, that price action nearly completely reversed itself by the end of trading (see chart below). One minute, just after one o’clock in the afternoon New York-time, it looked like they “fixed it.” By the time the markets closed for trading, less than three hours later, it appeared that they “broke it” again. I’d like to characterize these market movements as unusual, but over the past two months they’ve been anything but out of the ordinary.

Such gyrations in account values require a heightened sense of discipline and a refined plan of action that, all too frequently, demands inaction despite the overwhelming urge to sell, sell, sell. An overarching concept – know what you own and why you own it – may allow you to retain your portfolio’s most attractive holdings while also offering objective reasons for selling non longer desirable positions out of your portfolio. Below are a few questions that might prove useful in stress-testing your portfolio:

  • Do your most volatile positions still offer the requisite potential reward to warrant their volatility?
  • Is your level of diversification (stock-bond-alternative-cash, sectors within your stock allocation, duration within your bond allocation, and domestic-international) still appropriate?
  • For your overweight sectors or themes, do current conditions still support the overweight?
  • If a holding significantly appreciated – say maybe an energy holding in the recent environment – does it still possess valuation support or are you simply riding the momentum wave?
  • Bigger picture one here: do your investments still correlate with your comfort level with being invested and with your long-term investing goals?

As we’ve written and noted in several postings before, among the worst mistakes investors make involves selling at or near the bottom only to remain too scared to re-invest through a recovery. Staying invested through downturns, however, doesn’t mean remaining fully invested in the same holdings or at the same position sizes through thick and thin. Interest rates, operating environments, earnings and cash flows, and expectations for those earnings and cash flows, all change and, sometimes, our investments need to change in response. Many times, however, these changes prove to be relatively miniscule and, as a result, don’t warrant changes in our investments or plans.