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Understanding Markets

How to Use 2018’s Market Volatility to Your Advantage

The latter half of 2018 was a period of increased volatility. We view this as an opportunity for every investor.

Articles by Adam Grealish

By Adam Grealish
Director of Investing, Betterment  |  Published: January 3, 2019

In 2018, market volatility returned to historical average levels, but an unusually calm 2017 may make recent market fluctuations feel particularly jarring.

The return of volatility means customers had their risk tolerance tested. Investors should take the opportunity to confirm that their portfolio is aligned with their risk tolerance and use Betterment’s tools to help.

Betterment is using the recent volatility as an opportunity to help improve investor outcomes by automatically rebalancing portfolios and harvesting losses to reduce tax bills.

As we explored in the second quarter of 2018, market volatility has returned to historical average levels. After an unusually calm 2017, the return of choppier markets can feel particularly unsettling. Below, we’ll look at some ways you can use this jolt of volatility to your advantage.

Comparing Recent Volatility to History

A tried and true way to navigate a volatile market is to take a longer point of view. Indeed, if we look at the last decade, we see that the low volatility market of 2017 was particularly unusual and that 2018 was by no means extraordinary.

annual volatility chart from 2009 to 2018

 

Annual volatility of iShares MSCI ACWI ETF, a market capitalization-weighted global stock fund. Data source: Xignite. This particular ETF was chosen as it is a widely used global market cap fund, and represents a commonly used investable market cap global stock portfolio.

Before we let that sink in, let’s use the potentially jarring impact of recent volatility to our advantage and check in on risk tolerance.

If drops in the market are keeping you up at night and are giving you an itch to take chips off the table, your portfolio risk might be too high. Risk-taking is easy when stock prices are generally heading upward, but long-term investors’ resolve is tested during drawdowns. If, after getting a taste of market volatility this year, you find yourself wanting to sell in reaction to each market swoon, it may be a signal that your portfolio risk is not aligned with your personal tolerance for risk. You can review the allocation for each of your personalized Betterment goals to help guide you.

Volatility is an opportunity to check in on your goals.

Is your portfolio’s actual allocation in line with your target risk level? Are your goals’ end dates aligned with reality? With most goals, we advise that you reduce your portfolio risk as you near the goal, and in many cases, we automate this risk reduction for you. This process of de-risking the portfolio helps immunize you from drastic stock market dips as you get closer to needing the money you invested.

Remember, our technology isn’t sitting around during downturns.

As markets move, we automatically rebalance your portfolio. Not only does portfolio rebalancing help keep your risk aligned to your target; it’s also been shown to help produce higher returns than a simplistic buy-and-hold strategy.

In addition, our Tax Loss Harvesting+™ (TLH+) finds opportunities to harvest losses that can be used to reduce capital gains and ordinary income (up to $3,000) in the current tax year, or they can be rolled over to use in future years. Finally, our deposit advice is always adjusting to reflect the most recent market conditions, so you can know where you stand in order to help reach your goals.

See if TLH+ may be right for you.

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