Renowned strategist Liz Ann Sonders addresses market volatility and stresses the necessity of a solid investment plan to avoid panic during market downturns.
I first crossed paths with Liz Ann Sonders over a decade ago. It was in a green room, possibly at the Today Show, though it could have been MSNBC or CNBC—those places tend to blend together. At that time, the markets were turbulent, and bringing Sonders in was a wise choice. Now, she holds the position of Chief Investment Strategist at Charles Schwab, but I’ve always seen her as someone who can simplify the complexities of the market for everyday investors. That’s the essence of our discussion today, and it’s incredibly relevant.
Interviewer: Let’s begin with the broader view. How should women approach investing today?
Sonders: My philosophy, aligned with Schwab’s, emphasizes the importance of having a comprehensive plan. This should come first. Many investors are simply improvising.
Interviewer: What type of plan are we talking about?
Sonders: An asset allocation strategy. This varies depending on whether you're managing a self-directed investment account or a 401(k) that’s more automated. In either case, consider your allocation between equities and fixed income. Are you focused on generating income, or are you aiming for capital growth? Additionally, assess your risk tolerance, which is influenced by past experiences and not just your investment timeline.
Interviewer: Can we explore that further? The current market seems to be experiencing increased volatility.
Sonders: It's crucial to gauge your emotional resilience regarding your investments. A common pitfall for investors, even those crafting long-term strategies, is too closely linking their time horizon to their risk tolerance.
Interviewer: So, even if retirement is decades away, that doesn’t guarantee one can handle significant market declines emotionally?
Sonders: Exactly. If an 8% dip sends you into a panic, you likely lack the risk tolerance required for investing. If you can’t endure typical market corrections, that needs to be reflected in your asset allocation. However, structuring a portfolio to minimize losses will also cap potential gains. There’s no such thing as a risk-free investment. Investors often seek something that yields 5% to 6% consistently with no downside, but that simply doesn’t exist in today’s market. A professional might suggest a way to build a portfolio that mitigates losses, but guarantees are rare in investing.
Interviewer: How are you viewing the market currently?
Sonders: I don’t label myself as strictly bullish or bearish. Instead, I evaluate risks as I perceive them. Over the past few years, we’ve pointed out the risks tied to late-cycle economies. Our outlook at the end of 2017 was centered on the theme that “it’s getting late” in this economic expansion, which would likely shift the equity market landscape. We indicated that the era of minimal volatility—where 2017 recorded exceptionally low market downturns—was nearing its end. This wasn’t a doomsday message; rather, we anticipated increased volatility and larger fluctuations. Since the highs of January 2018, we’ve indeed witnessed significant market turbulence, yet stock performance has been limited.
Interviewer: What implications does this have for individual investors?
Sonders: Now’s not the time for unnecessary risks, and rebalancing can be beneficial. Periodic rebalancing offers two main advantages. Firstly, your portfolio signals when action is needed, eliminating the need to stress over what’s trending on financial news. If a specific asset class has significantly appreciated compared to others, your portfolio will indicate that with an increased allocation. Secondly, for those managing self-directed accounts, rebalancing encourages buying low and selling high—an approach that often runs counter to investor behavior. For 401(k)s, rebalancing happens through dollar-cost averaging.
Interviewer: Are we on the brink of a recession?
Sonders: If economic data continues to decline, it’s possible. Currently, there’s a clear distinction between the manufacturing and consumer sectors. The consumer segment is robust, but manufacturing, though smaller, often precedes consumer trends. If manufacturing weaknesses start affecting consumer spending, the risk of recession rises.
Interviewer: What advice do you have for women in investing?
Sonders: I don’t see a significant difference in advice for men or women. Many women have allowed their partners to manage finances. Our message is to understand how finances work—don’t wait until you’re unexpectedly handed control. I also believe financial literacy should be a mandatory subject in schools, ideally from high school onward. It’s astonishing that students may study ancient civilizations yet lack knowledge about basic financial concepts like IRAs and compound interest.
Interviewer: You’re hitting the nail on the head.
Sonders: Absolutely. Gaining insight into investing doesn’t mean you have to manage everything alone. Today, there’s an abundance of accessible information and support, and investment advice fees have dropped significantly. Most 401(k) providers offer continuous educational resources and guidance—you just need to stay informed and engaged.
Interviewer: We began our chat emphasizing the importance of having a plan. With so much volatility, how can investors ensure they adhere to their strategies?
Sonders: One reason advisors have clients formally approve a long-term strategy is so they can revisit it during challenging times. This helps answer the question: Have your long-term goals shifted? If not, stick with the plan. This approach can help you navigate stressful periods like early 2009—where panic marked the market's bottom. Having a well-documented long-term strategy, along with maintaining discipline in diversification and rebalancing, can help mitigate emotional investment errors.
