Learning to Navigate This Market

Nikulski Financial, Inc. |

According to the Wall Street Journal, the S&P 500 index is up 27% from the low on March 23rd through last Friday, May 1st.1 However, the future still seems unclear, doesn’t it? Every day we seem to get both positive and negative news about the state of the pandemic. Some states are re-opening and loosening restrictions, while others are steadfast in their extensions of stay-at-home measures.

As an individual investor, what are you to do in these times?

Well, depending on who you listen to, you may end up doing several things. You may end up sitting on the sidelines until the uncertainty becomes more certain, you may go all in and cross your fingers, or possibly a mix of the two.

One thing is for sure, if you are trying to navigate these timing issues by yourself, history and research has shown that most of the time, we get it wrong.2

We know how it felt watching our portfolios go down in February and March, but did we feel better seeing things improve some during the month of April?

Research shows that when things get better, we tend to not feel it equally as how those losses felt. Said otherwise, we tend to feel a loss about twice as severely as we experience a gain.3

After the decline of the global markets in March, April did give us some hope. The S&P 500 rose 12.7% last month.4 That was nice to see.

In our opinion, the best way to navigate these ups and downs always comes back to the plan. When the plan in place takes into consideration market downturns, there is a clarity and confidence that comes together when needing to make decisions, such as when to press the gas pedal or when to pump the brakes.

The largest component of the plan that determines these adjustments is your personal risk tolerance vs. your portfolio’s level of risk. With all our clients we use a tool called Riskalyze that measures a client’s acceptable level of risk and reward. Using this tool, we ensure that a client’s portfolio clearly defines their investment goals and expectations.

If you’re interested in figuring out what your risk score is, click here.

The great thing about this data is that it is based on returns, volatility and correlations, which update daily as we get additional pricing information. What this means is that as we have been helping clients navigate through this market, those risk scores have been helping us maintain the speed at which we either lean into buying opportunities or remain more conservative.

Being able to translate a portfolio into a “speed limit” based on pricing data absolutely helps make our jobs easier and, in the end, helps us create confident investment plans for all our clients.

1wsj.com – calculated performance of S&P 500 from closing value on 3/23/2020 to closing value on 5/1/2020.
3Tversky, A.; Kahneman, D. (1991). "Loss Aversion in Riskless Choice: A Reference Dependent Model". Quarterly Journal of Economics 106 (4): 1039–1061
4wsj.com – calculated performance of S&P 500 from closing value on 3/31/2020 to closing value on 4/30/2020.