Trimming the Sails: Preparing Your Portfolio for Choppy Seas

President Franklin D. Roosevelt, who led the nation through the misery of the Great Depression and the perils of World War II, is credited with the saying, “A smooth sea never made a skilled sailor.” In fact, countless words have been written and spoken in an attempt to try and capture the essence of the world’s oceans and their hold on our imagination. They can be calm and serene one day and lashed with dangerous waves the next.

In a similar way, the financial markets are famously unpredictable. All you have to do is think back over the past few years. Remember the end of 2019, when the stock market seemed to be headed up forever (remember, these were the last weeks of the longest bull market in history). But three short months later, news of a worldwide pandemic sent both markets and economies into a tailspin as scientists, public health officials, political leaders, and others scrambled to respond to an unprecedented threat. In the space of a single month, the S&P 500 fell from its all-time high of 3,380 to a low of 2,237, a staggering drop of nearly 34%. And then, over the next 19 months, it rose—amid wide fluctuations—to just shy of 4,800. Most of us remember what happened in 2022, as rampant inflation began to take its toll. The index fell to a low of 3,588 by October before beginning to recover—again, in fits and starts—rising to a post-pandemic high of 4,576 this past August. Since then, we have seen the market lose steam, primarily on continued worries about inflation and Fed policy. At this writing, the broad index as measured by the S&P 500 stands a bit below 4,328.

What’s the point of this brief history lesson? Just this: in order to enjoy the long-term returns available in the financial markets, it is necessary to accept the risks inherent in a constantly changing environment. Unforeseen geopolitical events—like the Russian invasion of Ukraine or the tragic current situation in Israel and Gaza—can cause shifts in sentiment that can depress market pricing. Governmental responses to economic shifts—even speculation about those responses—can send markets up or down, depending on investors’ interpretations. The fact is that it is impossible for anyone, regardless of their training or research, to consistently predict the short-term direction of the markets with better than random accuracy.

A little over a year ago, we wrote about how investors can actually use certain aspects of a down market to their advantage. And even though the broad market is up about 13% year-to-date, we cannot say with certainty which way things will move in the next few weeks. For that reason, it is important for investors to remember some fundamental principles.

Experienced sailors know they cannot control the weather or the tides, but they understand that certain things are in their control: the trim of the sails, the soundness of the rigging, the readiness of the equipment, and the integrity of the hull. In a similar way, investors cannot control the direction of the markets or the factors that influence those directions. But they can control the proper diversification of their portfolio, maintaining an appropriate balance of different types of assets, and commitment to a strategy that fits their age, investment goals, and capacity for assuming risk.

Most analysts believe that the markets will continue to exhibit volatility in the coming months. Investors should expect swings in both directions as markets respond to evolving Fed policy, economic indicators (especially concerning inflation), geopolitical uncertainties, and other factors beyond investors’ control. There may even be opportunities for some investors to take advantage of opportunities for tax-loss harvesting (as discussed in our article referenced above) as a means to both trim capital gains liabilities and to rebalance as a result of market pricing changes. For some portfolios, temporary pricing dips may present buying opportunities, allowing investors to add to desirable positions at “sale prices.”

But the most important ingredients for long term success continue to be the ability to maintain focus on elements within the investor’s control: appropriate portfolio composition, consistent rebalancing, resistance to emotion-based decisions, and commitment to a long-term strategy that aligns with the investor’s objectives and needs.

JFS Wealth Advisors, as a fiduciary financial advisor and wealth manager, is professionally and ethically committed to providing evidence-based guidance and advice, always presented with the client’s interests foremost. In up markets, down markets, and everything in between, we help you navigate in uncertain waters and stay on course for long term financial success. To learn more, visit our website to read our recent article, “Q3 2023: A Tale of Two Economies?”

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