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Why Volatility Is A Good Thing

Corporate earnings are a few weeks out, tension between the U.S. and China is increasing, and Republicans and Democrats are continuing their divisive stance in Washington. Not surprisingly, investors are freaked out, particularly younger ones who enjoyed a bull run in the stock market with little in the way of volatility for several years.

Volatility Is Normal
While the volatility and uncertainty may be keeping some investors up at night, Dan Egan, director of behavioral finance and investments at Betterment, the online investing company, said the markets are finally getting back to normal. “We are getting back to the way things should be with up and downs in the market,” said Egan in an interview with Investopedia. “The people who can’t take the heat get out of the kitchen, while the rest of us stick it out.”

According to Egan, with little in the way of volatility in the past few years, investors got used to the lack of risk, even though the basis for investing is getting paid to bear some risk. The absence of risk and volatility in the markets up until the start of this year had spooked more veteran investors. It’s the reason that online brokerages, particularly the ones with active traders, are seeing an uptick in trading activities. After all, the ups and downs in stocks provide opportunities to make money.

Stock Markets Are Supposed to Have Ups and Downs
Stock market investing is supposed to have ups and downs, but what is different this time around is the current White House administration, which has been taking a harder line on trade than the past administrations. As a result, Egan said there is a lot of noise emanating out of Washington and Wall Street that only serves to freak investors out more. “Noise on social media aren’t policy statements. Its innuendo and side comments by the actors involved. This form of public negotiations is performance art,” said the Betterment executive, noting that investors are getting caught up in that and forgetting the fundamentals like the U.S. economy, which is “extremely strong.” Earlier this month, President Trump followed through with his promise to place billions of dollars of tariffs on products coming into the country from China. China responded by saying it would retaliate in kind, prompting Trump to threaten even more in the way of levies.

While advisors will often counsel their clients to do nothing in environments of increased volatility and uncertainty, Egan said that isn’t the best advice for everyone. Humans have a strong motivation to act, and sitting on their hands isn’t one of their desired choices, which could make advising complacency hard to swallow. Betterment gets around that by providing a 14% range where investors can get more conservative or aggressive based on their own feelings about the market. That enables investors to play around with their portfolio without getting off track from a long-term perspective.

“The greatest strength is whether or not a trade war goes ahead, it doesn’t matter,” said the Betterment executive. The questions of whether you are saving enough, investing in the right places and taking advantage of the 401(k) match at your company are more important than predicting international trade and political outcomes.

source: investopedia.com

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