Market Update: Aug 27 2020
- Risk Tolerance
- Dow Jones
Here is a recap of our live Q&A session held on 8/27/20 presented by Joe Randazzo JD, CFP® from FNA Wealth Management and Dave Stone CPA, CFP® from Tartan Wealth Management.
Details for our next session, September 3, can be found here.
Can you comment on your definition of risk tolerance and how often I should revisit that?
That is a very fair question, especially in a year like this. I have long said that investors are inclined to take more risk when times are good than they are when times are bad. By its very definition, risk tolerance defines what losses you’re willing to accept when times are tough while, at the same time, trying to reap the rewards when times are good.
Some of your risk tolerance is defined by subjective standards, others by objective. For example, if you’re investing money that you intend to use in the next couple of years, your tolerance for risk of losing that money is low. In addition, if your goal is to preserve principle and live off of the income your money generates, your risk tolerance would also be low. If however you have 10 years before you would even consider withdrawing principle or income from your account, then risk tolerance is defined a little more subjectively. To illustrate, imagine you’re $100,000 portfolio in February dropped to $70,000 in March. Would your reaction have been: A. “sell it all and get me out”, B. “let’s buy more”, or C. “let it ride until it comes back”? How you answer that goes a long way in defining the level of risk you’re willing to take.
It’s necessary for clients that were extremely uneasy with the market volatility we saw in the first quarter to reevaluate the risk that they are taking. Now is a much better time to do that than earlier in the summer.
I read this week that 3 companies are being removed from the Dow Jones industrial average. What does that mean, and how should I expect that to affect those stocks?
The Dow Jones industrial average is an index of 30 companies and is a price weighted index. That means stocks with a higher share price hold more weight in calculating the value or performance of the index. When Apple announced a four for one split, its weighting went from the top to number 17 in the index. As a result, the technology weighting in the index dropped from about 27% to about 20%, causing S & P Dow Jones Indeces to reevaluate the structure of the index.
Historically speaking, stocks that are added to an index might see a short term rally in their share price, whereas, stocks removed from an index would see a short term drop in their share price. Typically, this Index Effect hasn’t lasted very long and stocks have quickly resumed their pre-Effect ways.
The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Beacon Financial Advisory or Lincoln Investment. The material presented is provided for informational purposes only. Nothing contained herein should be construed as a recommendation to buy or sell any securities. As with all investments, past performance is no guarantee of future results. No person or system can predict the market. All investments are subject to risk, including the risk of principal loss.