Erickson Advisors - Linda Erickson - HeadshotLinda P. Erickson

Linda P. Erickson, CFP®, is the president of Erickson Advisors and a registered principal offering securities through Cetera Advisor Networks, LLC, 336-274-9403 lindae@ericksonadvisors.net.

I have been telling clients for a while that we are likely to see increasing volatility in the stock market this year. Does this mean you should stay away? I believe not, but of course, that depends…

If you are taking systematic withdrawals, that is, income from your stock accounts, be sure you have at least six months and perhaps up to 18 months in cash or very short maturity bonds from which you take your distributions.

For all the rest of us, and for those accounts you are not touching for now, consider an investment plan for the long haul.

  1. Buy low and sell high. I know you’ve heard this over and over again, and I also know that most investors can’t help themselves. They want to buy when the markets are up and sell when markets have hit a low (or their definition of low). If you can’t bring yourself to invest, even in blue chip positions, when markets are declining, then at least refrain from selling out of fear.
  2. Consider the dividend. If you invest with the dividend in mind, you may be able to ignore, or at least be less fearful, knowing you are receiving a dividend that matches or exceeds what your cash holdings (think Money Market or CDs) are delivering. The current S&P 500 Index dividend yield is hovering around its average yield of 1.99 percent. Even though the Index was down (three percent in January), an investor could count on that dividend no matter where the daily price ended. Long term investors know that most of the total return on a portfolio comes from the dividends.
  3. Remain diversified. Construct a portfolio that includes at least the four main asset classes of 1) cash, 2) bonds, 3) domestic equities, and 4) international equities. In times of strong US stock market increases such as we saw in 2014, a diversified portfolio will probably lag a fully invested, all domestic equity portfolio. In times when this is not the case, however, owning a diversified portfolio means that no matter what asset class is performing best, you will own a bit of it. And when the equity market drops in those heart-stopping down days (think October of last year), you will have several positions that will stay steady or go up.
  4. Rebalance at least annually. Diversification and Rebalance go hand in hand, and this combination can be a powerful tool to minimize risk. Decide how you want to divide up your diversified portfolio, and realign your portfolio periodically back to the same percentages. This exercise will force you to sell high and buy low. I often remind clients that it is harder to sell high than buy low, but your fortitude in the face of wanting to ride the high even longer will pay off in the long haul. You will keep more of what you have earned and, if your tax situation will not be adversely affected in the extreme, the risk reduction should afford you better long term wealth management.