Success is not final; failure is not fatal; it is the continual courage to continue that counts.
~ Winston S. Churchill
Question: What are your thoughts and suggestions on how to respond to market volatility?
Answer: It’s human nature to have emotional responses to market activity in either direction. It may be helpful to consider a broader historical perspective before changing course financially when markets react to outside influences.
Movement up or down can often trigger emotional responses in investors that can influence actions impacting judgement and potentially affecting long-term plans. These periods of instability and volatility are an opportunity to connect with our trusted financial advisor, allowing them to be a sounding board for your concerns.
Talking about current events, trends, and geopolitical activity and how they may relate to your overall financial plan give you the chance to revisit your risk appetite, goals, and needs. This is an occasion for your advisor to provide reassurance to help you stay the course or readjust your financial plan if necessary.
The reactions to pullbacks make some investors want to exit the market and run for the exit sign. This response is often a mistake, especially for long-term investors. The right knowledge and historical perspective can help us avoid making investment decisions based on emotion rather than strategy. By looking at the market over a long period of time, we’re provided a testament of resiliency. As a 38-year veteran in the financial services industry, each decline along the way felt terrible, and declines today feel just as uncomfortable. When we focus on and track the overall growth the market has achieved, it’s clear that there are benefits to persistence, patience, and commitment.
Key concepts to remember are that:
1. The stock market is cyclical
2. Investors will likely encounter numerous pullbacks and/or corrections as long-term investors
3. A study of the stock market shows its resilience
4. In the long run, the upturns have always been stronger than the downturns.
Staying invested through volatile times is difficult and challenging.
Timing the market is a near-impossible task. By staying invested, even during periods of volatility, investors can increase their chances of achieving higher returns.
Look at the chart illustrating how missing even a few market days can impact overall returns. Over the past 15 years, the S&P 500 has grown at an annualized rate of 7.5%. However, removing only the five best trading days over that 15-year period would bring the index’s total growth down to 4.7%, and missing the 20 best trading days pulls its return into negative territory.
Don’t inadvertently miss out on important recovery days by trying to time the market’s every movement. Instead, speak with your advisor about how your long-term plan is positioned to weather short-term volatility – and discuss whether temporary pullbacks are an opportunity to strategically add to your portfolio.
Generally, returns have been less volatile over longer holding periods.
Returns over time have been positive in most cases.
Even a few strong market days can significantly impact total returns.
Dollar-cost averaging can help take advantage of volatility.
Especially during declines, your CERTIFIED FINANCIAL PLANNER™ practitioner can act as a sounding board for your concerns. Don’t hesitate to reach out to your advisor to discuss current events relative to your overall financial plan. She or he can provide reassuring perspectives to help you stay the course and take advantage of any opportunities that tumultuous markets can present. Stay focused and invest accordingly.
The opinions expressed are those of the writer as of October 3, 2021, but not necessarily those of Raymond James and Associates, and subject to change at any time. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. There is no guarantee any particular investment strategy will be successful. Asset allocation and diversification cannot ensure a profit or eliminate the risk of a loss. This information is general in nature, it is not a complete statement of all information necessary for making an investment decision and is not a recommendation or solicitation to buy or sell any particular investment. Investing involves risk and the possible loss of principal invested. There is no guarantee any particular investment strategy will be successful. Dollar-cost averaging cannot guarantee a profit or protect against a loss, and you should consider your financial ability to continue purchases through periods of low price levels.