Keeping your cool amid market volatility

Volatility in the stock market is inevitable. Large fluctuations, both up and down, have occurred consistently throughout the history of the market and are understandably met by investors with a mixture of emotions. This is most prevalent during market declines, when uncertainty produces fear, and fear leads to rash decisions. Managing emotions during volatile markets can be tough, but these tips can help you navigate the process.

 

Stay the course

Keeping a long-term perspective is crucial. When longer periods of investing are considered, the market has historically increased, despite short-term ups and downs. Although the challenges of today’s economy can feel new, volatility is not, and the market has shown resilience historically. Every S&P 500 downturn of roughly 15% or more since the 1930s has been followed by a recovery, and the recoveries have been strong. Returns in the first year after each market decline averaged 70.95%, with investment values more than doubling over the five years following each market low.^{1, 2} This shows investors who stayed the course during downturns have been rewarded in the past.

 

Spread the love

While diversification doesn’t guarantee profits, it does lower risk. By spreading investments across a variety of asset classes, investors lower the probability of volatility in their portfolios. When a portion of your assets is performing poorly, another portion is likely performing well, which helps minimize any losses. Now is a great time to review your asset allocation and make sure your portfolio’s diversification aligns with your investment goals.

 

Remember: Time in the market matters, not market timing

Our natural instinct is to flee the market when it starts to plummet. Greed prompts us to jump back in when stocks are skyrocketing. Both can have negative impacts, as no one can accurately predict short-term market moves, but missing just a handful of good days in the market can decrease earnings substantially. You can avoid attempts to time the market through dollar-cost averaging simply by contributing a fixed amount of money to your retirement plan each pay period, regardless of market ups and downs. This creates a strategy in which more shares are purchased at lower prices and fewer shares are purchased at higher prices. Averaged over time, investors pay less per share, increasing their relative earnings because short-term drops in the market can provide investing opportunities. So while you may be tempted to move money or withdraw assets, you’d probably also be missing out on compound earnings, as well as any gains the market potentially makes, while that money isn't invested. Remember, you’re in it for the long haul.

When markets inevitably become volatile and emotions are running high, confidence in your investing strategy can help bring a peace of mind that will allow you to continue to make sound, logical decisions while others react with panic. Short-term swings in the market can be scary, but they’re healthy and normal — and often benefit investors who stay the course, are appropriately diversified, and emphasize time in the market.

Sources:

1. Capital Group, RIMES, and Standard & Poor’s.
2. Bloomberg Index Services Ltd., RIMES, and Standard & Poor’s.