Interest rates, political agendas, corporate earnings, and other economic forces can lead to stock market volatility. This volatility, also called risk, can stoke fears and motivate some investors to make rash decisions that ultimately jeopardize their financial future. Although you cannot control the economic forces that drive market volatility, you can control how you react when volatility occurs. Working with Kletschke Wealth Management Group and having a well-designed financial plan will incorporate certain strategies to help defend against the pitfalls you may encounter when managing market risk.

On January 3, 1993, the hometown crowd poured out of Rich Stadium in Buffalo, New York, after the visiting team built a 32-point lead with 13:19 remaining in the third quarter. Disgusted by the performance of the hometown team, these Buffalo Bills fans lost perspective. There was still nearly an entire half of football to be played, and the hometown team featured one of the league’s most potent offenses. By making a rash decision, these fans missed one of the greatest comebacks in professional football history.

This cautionary tale demonstrates the importance of perspective and time horizon. If history is any indicator, there are bound to be countless market drops throughout a person’s life of accumulating wealth during their working years and taking income off that wealth in retirement. As your financial advisor, we help you withstand these short term market shifts and remain focused on your long-term financial goals.

Asset allocation is the process of apportioning an individual’s investment portfolio among different asset classes, such as stocks, bonds, and cash. A well-designed financial plan bases its asset allocation on your time horizon, goals, and risk tolerance. While stocks overall are expected to generate the highest rate of return over a long period of time, they also carry greater risk. Bonds tend to be less volatile, but they do not have the same growth potential as stocks. Cash is generally immune from market volatility, but its value may be eroded by inflation. Depending on your time horizon, goals, and risk tolerance, some combination of these three asset classes may be prudent.

At Kletschke Wealth Management Group, we take asset allocation a step further and diversify our portfolios within different types of stocks and bonds. We want different industries and sizes of companies in our portfolios, as this helps to reduce risk. For example, having all stocks in the technology sector doesn’t make for a well-diversified strategy. Many investors who had highly concentrated portfolios in tech stocks learned that lesson when the Dotcom bubble wreaked havoc in early 2000.

As diversified investments perform differently throughout various investment cycles, your assets may stray from the desired allocation. When the stock market is doing well, stocks may become over-represented in your portfolio, introducing more risk than intended. In order to minimize your exposure to undesired risk, we regularly rebalance portfolios. Rebalancing involves periodically buying or selling certain holdings to maintain the desired asset allocation. This may have tax consequences that you should discuss with your tax advisor.

Dollar-cost averaging is a systematic and disciplined investment strategy that helps to reduce the impact of market fluctuations. With this strategy, you invest a specific dollar amount on a regular basis. It is very similar to adding money in your 401(k) each month. The price of the desired holdings will determine how many shares you are able to buy. This disciplined approach to investing will discourage emotional decisions and help you continue to move toward your financial goals.

If managing risk is more than what you have time for or if you’d like a second opinion on your portfolio’s risk, contact Kim and Korey at Kletschke Wealth Management Group!

Kletschke Wealth Management Group
700 4th Street, Suite 100
Sioux City, Iowa 51101
(712) 252-6931
[email protected]