Market Uncertainty . . . Know Your Rules

Copyright: <a href='https://www.123rf.com/profile_paulgrecaud'>paulgrecaud / 123RF Stock Photo</a>Winter’s grip held on a little too strong this year. Now that spring is here (hopefully), many of us are cleaning up some of the last of the damage left in the wake of repeated Nor’easters hitting the coast over the winter.

Take my buddy Dave, for example. The storm that hit us at the beginning of March really did a number on his property. Those horrible winds you might remember took down a big old maple tree in his back yard. It cracked in half and came crashing down right on Dave’s fence. Missed the house and no one was hurt, but more than 30 feet of cedar stockade fence – an entire segment running to his neighbor’s property – needed to be replaced.

Dave couldn’t believe how high the estimates were to get this work done. They had some fence work done a few years ago, and the prices were significantly less. He compared the quotes he just received to those old quotes and saw that the labor cost is the same now, but the material is a lot more expensive.

It turns out that fencing companies are charging much more for cedar now than they were even a year ago.

You see, fencing companies and other industries that use cedar and other softwood lumber depend on imported Canadian wood; wood that’s gotten a lot more expensive since last year. The National Association of Home Builders recently reported that a combination of new tariffs imposed by the current administration on our trade allies and a shortage of building materials as a result of natural disasters has caused a 30% jump in softwood lumber import prices just since last summer.

What does the price of cedar fencing have to do with your retirement? Perhaps nothing, unless you have investments in the timber industry. But it’s a symptom of a more significant issue affecting Wall Street: A lot of uncertainty about what’s going to come next.

It seems almost every time you open a paper or turn on the news, there’s a report about an impending trade war with China or bad news involving Mexico and Canada, our NAFTA partners. We hear a lot about aluminum prices, steel prices . . . even soybeans, and about how the latest saber-rattling in Washington D.C. and Beijing is going to affect the semiconductor market. But lumber? Go figure.

In the short term, all of this news is creating a lot of fear, uncertainty and doubt. According to Bloomberg, the CBOE Volatility Index (VIX), a measure of the market’s expectation of volatility, jumped 81 percent for the first quarter of 2018. But the possibility of a trade war with China isn’t the only thing making investors nervous; concerns about interest rates, bad news about some tech stocks and other matters have all resulted in some wild first-quarter gyrations on Wall Street.

Here’s the problem . . . when there is volatility in the markets, we sometimes make “gut instinct” decisions about how to invest – what might “feel” right given the circumstances. It’s human nature to let our emotions direct us during times of uncertainty. But using emotions as an investment strategy, well, is never successful. Investors who are driven by emotion will often buy a stock, hold it, then hit the panic button and sell at exactly the wrong time.

Folks, this is why I always fall back to rules-based investing. We have talked a bit about this over the past few weeks. Rules-based investing will often combine both strategic and tactical investment philosophies. The tactical piece of such an approach may utilize strategies that can help protect a portfolio from significant market volatility.

The strategic element to a rules-based investment approach will often include diversification between asset classes and will have a solid rebalancing schedule in place.

It’s important to periodically examine the weightings of assets in an investment portfolio to make sure they are aligned with an investor’s risk tolerance because a portfolio mix is going to change over time as some assets perform well and others underperform.

Over time, failing to rebalance a portfolio can expose an investor to additional risk. Take this example: Let’s say you initially allocated 60% of your investment portfolio to stocks and 40% to bonds. Over time the stocks performed well – eventually, your portfolio might be 75% stocks and 25% bonds. Without rebalancing, 15% of your total assets could be subject to more risk than what you can tolerate, or anticipate, in the event of a significant market correction.

Chasing market highs and lows and trying to predict what will happen because of the latest news from Washington D.C. isn’t strategic thinking – it’s emotional investing, and emotional investing, more often than not, leads to failure.

I don’t care what you are reading or hearing in the news. Whether the focus is on trade wars, NAFTA, soybeans or sheep, know your rules. Make sure they are aligned with your investment philosophy and your needs. If it has been a while since you have rebalanced your portfolio, now’s a really good time to talk to your investment advisor to make sure you stay on track and don’t expose yourself to risk unnecessarily.

Be vigilant and stay alert…and define your rules.

Have a great week!

Jeff Cutter, CPA/PFS is President at Cutter Financial Group, LLC. A wealth management firm with offices is Falmouth, Duxbury, and Mansfield. Jeff can be reached at jeff@cutterfinancialgroup.com.

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