“If you don’t like the weather, stick around. It will change.” For many Louisvillians, that irreverent statement is proven true too often, sometimes more than once during a single day.
For investors, not only in this region but across the country, the economy can seem nearly as unpredictable as Ohio Valley weather. Ebbs and flows in the stock market, interest rates, inflation and myriad other indicators are inevitable. Simply put, changes are going to happen, and financial advisors at J.J.B. Hilliard, W.L. Lyons LLC say the only way to effectively deal with impending economic fluctuations and the ensuing volatility is to develop a long-term financial plan.
The first rule of thumb? Don’t panic.
According to Mark Nickel, director of portfolio management for Hilliard Lyons Trust Co. LLC, prior to the nearly 1,700-point drop in the Dow Jones industrial average in late August, investors had been experiencing the third-longest period in history without a 10 percent market correction. “We’ve been counseling clients that this kind of correction was going to happen,” he said. “Volatility was bound to come back.”
Rather than be reactionary, he advised clients to stay their course. “We asked our clients, ‘What are your income needs, are we able to meet that need, and is the income we’re generating safe and secure?’ If so, there is no reason to make any drastic changes,” Nickel said.
While investors shouldn’t veer too far afield from their established strategy, economic instability does require them to be nimble in their approach.
Global events have contributed to the recent U.S. market dips. This summer, China’s stock market took a dive, which impacted markets stateside. And Volkswagen, the world’s largest automaker, is in the midst of a scandal over its rigging of diesel engine emissions tests, which has caused an erosion of faith in the auto industry.
“Volkswagen is a good example of why you diversify,” said Nickel. “It’s not a wise strategy for clients to be heavily reliant on one holding.”
“It’s good to diversify not only by company, but also by industry,” added Jaleigh White, executive vice president and director of wealth services for Hilliard Lyons. “For example, if our clients are employees of the company they invest heavily in, then just by the nature of their employment, a lot of their net worth is tied up in those companies. When we work on their allocation, we take that into consideration to make sure we are properly diversifying them” among other market segments.
Portfolio diversification is only one consideration during long-term financial planning. Interest rates also are a major factor in an investor’s return, and another reason to adjust their investment strategy.
Interest rates are at historic lows — close to zero — and have held steady for the past six years. Throughout 2015, concern over when the Fed is going to raise rates has been a consistent theme for financial planners, Nickel said. To anticipate the fickle Fed, Hilliard Lyons has been providing its clients with some context on the current market cycle.
“The market bottomed out on March 9, 2009, so we are now 78 months into this bull market,” Nickel said. “The average bull market since 1928 has lasted about 57 months. We are well past that now, so we reminding clients that we’re getting a little long in the tooth. We’re also taking into account what the Fed may or may not do,” Nickel said. As a result, Hilliard Lyons wealth managers have spent much of the past 12-18 months rebalancing clients’ portfolios.
“It’s been a challenging cycle because a big part of our portfolios are based on interest rates — fixed-income investments,” Nickel said. “If we take money out of equities, there is no place to put it that has an attractive yield.” In that case, Hilliard advises clients that while they may not be getting a great return, the rebalance preserves their capital.
“You don’t throw the baby out with the bath water because there are other risks associated with different asset classes,” Nickel added.
In addition to making changes to existing allocations, White advises investors to take advantage of today’s lower stock prices on companies with proven track records. “This is the time to invest cash that has built up beyond normal levels,” she said.
“The fundamental value of the companies didn’t change, just the price of the stock, so that really created some attractive buying opportunities,” White said.
Techniques like diversification, rebalancing and buying up devalued stock may help stabilize an investment portfolio for the short term, but to navigate potential economic storm clouds in the future, every investor needs a trusted financial advisor to set up solid objectives and an overall strategy. Established in 1854, Hilliard Lyons has worked with thousands of families spanning multiple generations, sustaining their financial viability through careful planning.
“Understanding the culture of a family is really important when you’re trying to help clients deal with not only the current economic instability but also planning for the legacy of their family going forward,” White said. “It really helps when you have that long-term relationship.”