Everyday investors and their financial advisors are rightly confused and perhaps a bit angry. It is particularly frustrating when the stock market action de-couples from the reality of a robust US Economy. In addition, it is not likely that a regulatory or policy response to the exaggerated impact of computerized trading is imminent. Sadly, some investors will seek to eliminate the emotional stress of such volatility and get out of the market entirely.
Our view is that investors should recognize that these occasional market dislocations are likely to be short-lived and quickly reversed. It would seem near impossible to profitably get in front of such moves. We think the best course of action for long-term investors would be to embrace the temporal theory of these exaggerated moves by opportunistically rebalancing one’s portfolio. By way of example, an investor who is 60% stocks and 40% bonds would see their portfolio mix shift to approximately 54% stocks and 46% bonds after a 20% drop in equity prices. simple rebalance back to the intended allocation would prove profitable assuming equity markets recover.
This article was contributed by:
Herb W. Morgan, III Senior Managing Director
Chief Investment Officer
Efficient Market Advisors, A Business Of Cantor Fitzgerald Investment Advisors
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