Warning Signals

Warning Signals

by Amber Idleman on Apr 10, 2018

If you have any money invested in the stock market, whether through individual stocks or mutual funds you are aware of the recent market volatility. This is quite a bit different from 2017 when most of the year was smooth sailing.  Does that mean you pull out of the market completely?  Or ride it out no matter what?  Neither one may be the answer right now. 

We look at a number of indicators to assess risk in the market and lately they have been flashing caution signals.  So, what does that mean?

Let’s say at this point it is like a weather warning.  For example, a few nights ago the weather reporter warned of a strong line of thunderstorms approaching with potentially high winds.  Did I evacuate like it was a hurricane?  No, but I did take down my patio umbrella and some hanging plants.  And we did have some high winds but nothing damaging.  Still, I am glad I took those precautions. 

Another analogy is like traffic signals.  If you approach an intersection and the light is green and visibility is good then you will probably just go through the intersection.  But if there is a flashing yellow light and your view of part of the intersection is obstructed then you will likely slow down and look both ways. 

Markets can be like that.  Most of last year was a green light with good visibility.  Now we may be seeing a flashing yellow light.  It might be a good idea to slow down your investments until the traffic signal changes. 

Managing risk is an ongoing process and market exposure needs to be periodically adjusted.  Remember Benjamin Graham’s insightful observation; “The essence of investment management is the management of risks, not the management of returns.” 

 

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