Long-Term Diversification Trumps a Volatile Market: Here’s Why

In recent weeks, President Donald Trump has exacerbated the global trade war by threatening to impose a 5% tariff on all goods imported from Mexico on top of the tariffs already being imposed on merchandise from China.

While President Trump’s tariffs are designed to harm the economies of China and Mexico, fears of harm to the American economy and eventual recession are mounting. The anxiety surrounding increasing market volatility, such as the sharp fall in the stock value of car manufacturers following Trump’s tweet announcing his intent to put a tariff on Mexican goods, is only worsened by the economical interconnectedness of the United States with Canada and Mexico.

While Trump’s trade war is generating changes in the market, investors may begin to worry regarding the safety of their investments in the stock market. However, the most manageable route to avoiding poor decision-making regarding investments is to maintain an asset allocation based upon your acceptable level of risk and trust that in the long run, no investor is going to beat the market. Stock market investments should not be positioned around Trump’s latest tweet, but rather around a diversified, long-term portfolio with an asset allocation based on your risk tolerance and ability to stay invested through a full market cycle. However, bearing in mind the propensity for great market volatility, the amount of risk in an investment profile ought to coincide with the timeline of the investor’s goals.

Risk and the Investment Timeline

One article from CNBC states that the sooner an investor is going to retire (or otherwise withdraw money from their portfolio), the less risk should be present in their investments.

This prevents older investors from being in a situation where they need to take money out of their portfolio at a discount during a recession. This also implies that younger investors and those who don’t plan on liquidating their assets for a long time shouldn’t be as concerned about the volatility of the stock market and higher risks associated with their portfolio are acceptable.

The M3 Difference

At M3 Wealth Advisors, we believe that financial planning drives asset allocation and evaluate risk in 5-year segments from the time of estimated retirement. The money that will need to be withdrawn in the next 5 years should be invested with minimal risk, investments that will be liquidated in 5-10 years should carry slightly more risk, and so on. This strategy of portfolio diversification with a timeline of risk variation may allow for protection against potential market crashes because money that would be needed in the next five years would not be subjected to the risks of the stock market.

 Despite these self-evident beliefs, even the most practical investors may experience the panic of a stock market drop and feel tempted to make an irrational investing decision. For this reason, many choose a passive investment approach, or a digital platform that can provide rational and unbiased portfolio management.

These automated platforms, such as the M3’s model portfolios, are typically grounded in a strategy of long-term asset allocation and do not respond to market volatility. The commitment to placement of a model between an investor and their brokerage account may make it more difficult for that investor to irrationally liquidate their holdingsor adjust their asset allocation in a panic. It is for this reason that robo-advisors, passive investing, automated and model portfolios have become an essential tool for many investors in the past decade: they determine a rational allocation for an investor’s risk level and aren’t swayed by the cyclical nature of the stock market.

Determine the risk in your investments and evaluate if this risk matches your planning needs for freethrough the link below.