Risky Business
Why volatility could mean greater opportunity—and potential peril—for local investors
by Bill Donahue


To paraphrase Charles Dickens from his classic novel, “A Tale of Two Cities,” right now could be either the best of times or the worst of times for today’s eager investor.


Although the U.S. economy continues to show signs of stop-and-start improvement, the environment at home remains one rife with question marks. What’s more, the world is becoming increasingly small, with global financial markets and a delicate energy infrastructure keeping the fates of countries neatly intertwined. Disruption in Middle Eastern or African oil fields, for example, or worry over the lingering financial crisis in Spain could ultimately affect the United States and, in turn, U.S. investors.


Historically speaking, the financial markets are approximately three times more volatile than they have been in the past, according to research from Boston-based Standard & Poor’s Financial Communications. Since 2000, the S&P 500 rose by at least 2 percent an average of 12.5 times per year and sank an average of more than 14 times per year, compared with an average of five times (rising or falling) per year from 1950 to 1999. Even so, volatility doesn’t mean investors should hoard their money beneath a mattress and simply “wait it out.” 


Even with the limping-along U.S. economy and other gloomy indicators, “I don’t ever think that things are different now,” says Scott Holstein, president of Prudential Wealth Management Inc., an investment firm based in Feasterville. “There’s a lot more volatility now, and it’s here to stay for the foreseeable future. … But just because it’s raining today, it doesn’t mean you wear a raincoat every day.”


Investment advisors and portfolio managers suggest a multifaceted approach to protecting and growing one’s investment dollars in times of relative uncertainty.


Know yourself: Tailor one’s investment strategy around factors such as the amount of one’s investable assets, risk tolerance (conservative, aggressive or somewhere in between) and overall investing goals. Know the answers to tough questions, such as how much money one might be comfortable losing in a worst-case scenario. The goals and risk tolerance—and, most likely, investment dollars—of a 35-year-old investor who has no children will be much different than a 55-year-old with two kids in college.


Think ahead: Investors should refrain from getting caught up in the stock market’s often rollercoaster-like activity. Obsessing over these shifts might be natural but can also cause investors to make rash, ill-informed decisions. Instead, focus on whether long-term performance objectives—specifically, average returns over time—are meeting one’s goals.


Stay calm: Statistics suggest investors who panic—selling in a sinking market, buying in a ballooning market—are the ones who stand to lose the most. Standard & Poor’s suggests investors who panicked and, as a result, missed out on the five best-performing days of the 20 years ending Dec. 31, 2010, would have forfeited more than $19,000, based on an original investment of $10,000 in the S&P 500. Missing the top 20 days would have reduced one’s average annual return from 9.14 percent to 3 percent.


Allocate, allocate, allocate: In times of heightened volatility, stocks and other higher-risk asset classes tend to fluctuate more, while lower-risk assets (bonds, cash, precious metals) tend to be more stable. By allocating one’s investments in different asset classes, an investor’s asset base is less vulnerable to market volatility.


Look to buy: Selectively adding to one’s portfolio when prices are low compared with historical averages could be an effective strategy, even with the past three years of portentous headlines and schizophrenic market fluctuation. This might not hold true, however, in the event of a double-dip recession or disaster in European credit markets.


Be informed: Unless someone has the time and resources to spend researching all his or her investment options and understands the fickleness of the financial markets, linking arms with someone who does could reap greater dividends.


“Many people get to a point in their life when they say, ‘I’d rather be doing something else with my time other than agonizing over what’s my next investment and how does it fit in and does it provide income for my family and myself?’” says Irvin G. Schorsch III, president and founder of Pennsylvania Capital Management Inc., an investment firm based in Jenkintown. “It’s stressful to have to manage your financial affairs, and you can hand that stress off to talented professionals. It’s good to be able to say, ‘Let’s take a trip,’ rather than staying home and worrying. It’s about building comfort and confidence.


“If you say, ‘Not a chance, I love doing this; I don’t mind spending five to 10 hours a week,’ which is about the right time to do it,” he continues, “well, then they shouldn’t come to a firm like ours.”


Seeking Stable Ground

If one does decide to work with an advisory firm, choose wisely and work with someone who has a deep understanding of client-specific investments goals and always puts clients’ goals ahead of his or her own. Considering the fact that financial goals evolve over time, investors should seek out a versatile firm that has relationships with affiliated experts—attorneys and tax accountants for issues including wealth transfer and business succession—who can help with the transition to the next phase of life.


Heading deeper into 2012, advisors suggest a steady yet cautious approach. The many-headed dragon of volatility, which offers both opportunity and peril, will continue in the form of political gridlock in Washington, an escalation in borrowing by the U.S. government and various crises faced by municipalities across the United States, not to mention growing concern over eurozone countries’ fiscal woes. As a result, advisors recommend a diversified approach—balancing investments among, say, U.S equities with a proven record of increasing dividends and precious metals, with a dose of carefully chosen bonds for stability.


“Careful attention should be paid to shorter maturities in case inflation rears its ugly head,” says Schorsch. “We know inflation is coming; it’s just a question of when. … Your goals are going to be different if you’re 20 than if you’re 60 or 80, so every individual needs to have a partner firm that can look at them and say, ‘These are appropriate for you. Here are the issues, here are some of the asset classes that may be appropriate to evaluate.’


“Whatever firm you work with—if you do work with a firm—it has to be capable of handling the [market’s] ups and downs consistent with the client’s needs.”