Market volatility may be triggered by a variety of factors, including policy uncertainty in Washington, earnings reports, geopolitical instability, and a slew of other factors that are difficult to categorize. Furthermore, even experienced investors might be rattled by market movements. However, volatility is an unavoidable aspect of the investment process.
According to Ann Dowd, CFP®, vice president at Fidelity Investments, “dramatic changes in the market may drive you to rethink your plan and become concerned about your money.” In response to that worry, it’s normal to want to limit or remove all exposure to stocks, believing that doing so would prevent more losses and soothe your anxieties. However, this may not be the best course of action in the long term.
Instead of being concerned about volatility, prepare for it. When you have a well-defined investing strategy that is personalized to your objectives and financial circumstances, you may be better prepared to weather the typical ups and downs of the market and to take advantage of investment opportunities when they emerge.
Dowd advises investors to keep an eye on their assets and make sure they have a well-diversified portfolio that includes small and large companies in the US, as well as international stocks and investment-grade bonds, to ensure that the overall risk in their portfolio is aligned with their personality and financial goals.
The Most Important Takeaways
• A continual state of uncertainty prevails, and downturns occur on a regular basis. Market reversals, on the other hand, have often been followed by recoveries.
• Maintain your discipline: Trying to timing the market has shown to be difficult–and perhaps costly.
• Prepare for a number of marketplaces, including: An investment strategy that is tailored to your own objectives and circumstances may be able to assist you in coping with short-term volatility.
• Take the following into consideration: Consult with your adviser to develop a plan that is appropriate for your risk tolerance.
1. Maintain a Sense of Perspective–Downturns are Natural and Often Brief.
Despite the fact that market drops are distressing, history has shown that the stock market is capable of recovering and can still give investors with excellent long-term returns. This overall pattern has been in action since the middle of 2015. During the third quarter of 2015, after China devalued its currency; in the first quarter of 2016, following the drop in oil prices; in Q2 2016, following the vote to leave the European Union; in the run-up to the 2016 US presidential election; and in the second quarter of 2018, concerns about trade roiled investors. Despite this, the market gained more than 30% overall during the course of the three-year period in question.
Failure to achieve success in the past does not ensure success in the future. The Standard & Poor’s 500® Index is a market capitalization-weighted index of 500 common companies selected for their market size, liquidity, and representation of several sector groups. The Standard & Poor’s logo and the S&P 500 index are trademarks of Standard & Poor’s Financial Services LLC. The CBOE Volatility Index is a significant indicator of market expectations of near-term volatility, as expressed by option prices on the S&P 500 index of stocks. Because of the index’s nature, investing directly in it is not an option.
2. Feel Confident in Your Financial Decisions.
If you get concerned when the market falls, it is possible that you are not in the correct investments. Your time horizon, objectives, and risk tolerance are all important aspects in determining whether or not you have an investment plan that is effective for you.
Although you may have a long enough time horizon to justify a riskier investment strategy, you must be okay with the short-term ups and downs that you may experience. If you find it too stressful to see your account balances change, try working with your adviser to review your investment mix until you find one that feels suitable for your situation.
To avoid being too conservative, particularly if you have a long-time horizon, avoid adopting tactics that are too conservative. Strategies that are too conservative may not give the development potential necessary to fulfill your objectives. Make sure you have reasonable expectations as well. It may be simpler to stay with your long-term investment plan if you do it this way. Select the number of stocks with which you are most comfortable.
3. Avoid Attempting to Time the Market.
Attempting to enter and exit the market might be quite expensive. Independent research company Morningstar has shown that the choices investors make about when to acquire and sell mutual funds lead those investors to perform worse than they would have done if they had just bought and held the same funds for the entire time period studied.
When it comes to investing, it would be ideal if you could avoid terrible days and capitalize on good ones. The issue is that it is hard to forecast when those good and bad days will occur on a constant basis. And even if you just miss a couple of the greatest days, it might have a long-term impact on your investment portfolio.
Previous success does not indicate a promise of similar results in the future. The hypothetical example assumes an investment that replicates the returns of the S&P 500® Index and includes dividend reinvestment; however, it does not account for the effect of taxes, which would reduce these statistics significantly. When the market is volatile, every purchase or transaction at any moment in time might result in a profit or a loss for the buyer or the seller. Your personal investment experience, including the chance of a loss, will be unique to you.
Because of the nature of an index, it is not possible to invest directly in an index. In addition to being a registered trademark of The McGraw-Hill Companies, Inc., the S&P 500®Index, which measures the performance of common companies based on their market capitalization, has been licensed for use by Fidelity Distributors Corporation. As of June 29, 2018, the data comes from FMRCo’s Asset Allocation Research Team.
4. Invest on a Regular Basis, Notwithstanding Market Volatility.
The short-term downturns in the stock market will have little effect on your overall success if you invest consistently over months, years, and even decades. When investing, instead of relying on market circumstances to choose when to purchase and sell, adopt a disciplined approach with an adviser, making investments on a weekly, monthly, or quarterly basis. This will help you avoid the pitfalls of attempting to time the market.
Continued investment during downturns does not ensure profits or the absence of losses, but when prices do fall, you may find that you are really benefiting from the decrease in value in the long term. When the stock market falls, the prices of investments fall as well, allowing you to purchase a greater number of shares with your monthly payments.
In fact, several of the moments that seemed to be the worst for getting into the market turned out to be the most advantageous. The biggest five-year return in the history of the United States stock market started in May 1932, during the depths of the Great Depression. The next greatest 5-year period started in July 1982, when the economy was in the throes of one of the worst recessions in postwar history, with double-digit unemployment and interest rates, among other indicators.
The total return of the S&P 500® Index represents the performance of the US stock market. Past achievement does not guarantee future success. Investing in an index is not available at this time. The first three dates are decided by the highest 5-year market performance after the month indicated. As of July 1, 2018, the following sources were used: Ibbotson, Factset, FMRCo, and the Asset Allocation Research Team.
5. Take Advantage of Any Possibilities that Arise.
It’s possible that you and your adviser can take a few steps together when the markets are down to assist put you in a better position for the long run. Example: If you have assets that you would want to sell, a downturn may provide a chance for tax-loss harvesting–when you sell an investment and realize a loss–in the event of a market decline. That might be beneficial in your tax preparation.
In the end, if the movement of the markets has shifted your mix of large-cap, small-cap, international, and domestic stocks, as well as your mix of stocks and bonds, you may want to consult with your financial adviser and rebalance to get back on track. That might give you with a more disciplined strategy that allows you to take advantage of cheaper pricing more effectively.
6. Think About Taking a Hands-Off Attitude.
In order to alleviate the stress of managing assets in a turbulent market, consult with your adviser to develop a plan that is appropriate for your level of risk tolerance.
The bottom line is as follows:
To avoid being distracted by market turmoil, wondering if you should take action right now, or worrying about what the market will do tomorrow, it makes more sense to concentrate on building and maintaining a strong investment strategy with your adviser, rather than trying to time the market. A sound financial plan can assist you in navigating the market’s ups and downs and may even enable you to reach your financial objectives.