By Yann Kostic from the July 2016 Edition
Is your portfolio ready for summer?
This time of year, most of us are in vacation mode – and the same can be said for the people who drive the financial markets. Investment analysts, traders, brokers, and money managers take vacations, too.
As a result, the summer season is generally a slow time for financial markets, leading to what finance professionals call “the summer doldrums.” It’s an important concept to understand, because it can affect your portfolio.
When financial professionals are out of the office, they aren’t buying and selling stocks and bonds. That leads to reduced activity in the financial markets, and is sometimes referred to as “low volume.”
Interestingly, low volume means greater volatility. Why? Because the few purchases and sales that are completed have a bigger impact on the price of the stock or bond.
Think about it: if you sell 1,000 shares of a stock that trades, on average, 100,000 shares a day, your sale is only 1% of the total sales volume. But during the summer doldrums, if you sell 1,000 shares of the same stock that now trades, on average, 10,000 shares a day, your sale has become 10% of the total sales volume.
You may want to keep that in mind as you review your account statements over the summer. Don’t panic and decide to sell just because your investments decline; be sure you have a portfolio that is allocated appropriately for your goals, and then ride the wave. And take heart: the summer doldrums end after Labor Day.
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