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In this episode of Intelligent Money Minute, I had the pleasure of interviewing Larry Swedroe, head of Financial and Economic Research at Buckingham Strategic Wealth, on the topic of how intelligent investors should respond to volatility. As a CFA and CPA, I understand the importance of navigating market volatility and its impact on investment strategies. In this blog, I will summarize the insightful discussion with Larry, providing key takeaways on the causes of volatility and how intelligent investors can respond to market uncertainties.
Causes of Volatility
Larry Swedroe begins by explaining that volatility is primarily caused by unexpected events. Since these events are unforecastable, investors should expect and prepare for periods of high volatility. Intelligent investors should incorporate this certainty into their investment plans and avoid taking more risks than necessary. Swedroe suggests assessing one’s ability, willingness, and need to take risks, ensuring that the investment portfolio aligns with these factors. He also highlights recent trends that have contributed to increased volatility, such as the shift from active to passive strategies like indexing. The rise of passive investing has led to lower turnover and reduced liquidity, resulting in greater volatility in pricing. Additionally, changes in trading rules and the Volcker Rule have further limited liquidity in the markets, amplifying volatility.
Intelligent Investor’s Response to Volatility
In response to market volatility, intelligent investors should adopt a well-structured investment plan. Swedroe emphasizes the need for a diversified portfolio and advises against taking excessive risks. He recommends keeping equity exposure within a range of 25-30% for those with enough wealth. Building a portfolio with more diversified assets can help mitigate risk without sacrificing returns. Additionally, Swedroe emphasizes the importance of sticking to the plan and not succumbing to panic-driven selling. By setting realistic expectations and aligning risk tolerance with portfolio composition, intelligent investors can navigate market volatility more effectively.
The Price of Admission
Volatility is often referred to as the price of admission for higher expected returns. Intelligent investors understand that market fluctuations are an inherent part of investing and should be prepared to weather these storms. By accepting the uncertainty and having a well-defined investment plan, investors can focus on long-term goals and avoid making impulsive decisions driven by short-term market fluctuations. Swedroe and I agree that risk should be carefully evaluated based on an investor’s financial situation, willingness to take risks, and specific investment goals.
Volatility is an unavoidable aspect of investing, but intelligent investors can respond effectively by incorporating it into their investment plans. By understanding the causes of volatility, such as unexpected events and shifts in market dynamics, investors can adjust their strategies accordingly. Building diversified portfolios, aligning risk tolerance with portfolio composition, and maintaining a long-term perspective are key elements of intelligent investing in the face of market volatility. Remember, a well-structured investment plan and disciplined approach can help you weather market uncertainties and maximize your investment potential.
We’ll be interviewing Larry on several podcasts regarding markets, passive investing, and diversification, so be sure to subscribe to our Intelligent Money Minute podcasts.
Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “The Only Guide to a Winning Investment Strategy You’ll Ever Need.” He has since authored seven more books.
Larry Swedroe Bio
Since joining Buckingham Strategic Wealth in 1996, Chief Research Officer Larry Swedroe has spent his time and energy educating investors on the benefits of evidence-based investing.
In his role as chief research officer and as a member of the firm’s Investment Policy Committee and Board of Directors, Larry regularly reviews the findings published in dozens of peer-reviewed financial journals, evaluates the outcomes and uses the result to inform the firm’s formal investment strategy recommendations.
Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television shows airing on NBC, CNBC, CNN and Bloomberg Personal Finance. Larry is a prolific writer, contributing regularly to multiple outlets, including Advisor Perspectives and ETF.com.
Before joining Buckingham, Larry was vice chairman of Prudential Home Mortgage and senior vice president at Citicorp.
Larry holds an MBA in finance and investment from NYU and a bachelor’s degree in finance from Baruch College.
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