Triggers for market volatility can come in many different shapes and sizes, i.e. policy uncertainty in Washington, earnings reports, geopolitical unrest, among others; however, volatility is part of investing. Volatile markets tend to make investors, especially novice investors, get startled and begin to question their investment strategies and be tempted to pull out of the market and wait on the sidelines until they feel safe to get back in.
It is important to understand that market volatility is inevitable since it is the nature of the market to move up and down over the short term; that is why it is imperative for investors to maintain a long-term perspective and ignore the short-term fluctuations. Make sure you consider an investing strategy with exposure to different areas of the markets (US small and large-caps, international stocks, investment-grade bonds, etc.) to help match the overall risk in your portfolio to your personality and goals. Here are a few tips to make the most out of market volatility:
- Don’t let emotions take over: First and foremost, don’t panic when volatility presents itself, corrections are normal and to be expected; they are healthy because they give people an opportunity to bring new money into the market. There is an inclination to sell when investments decline; it is important to understand that selling in a dip locks in your losses, instead of allowing that investment time to recover. Sell-offs are frequently followed by rebounds, therefore, view pullbacks as opportunities to buy investments that were previously overvalued (review the fundamentals for those investments with your Financial Advisor). Remember that during volatile times less is more- a bad volatility-induced trade can be hard to recover from later on.
- Keep things in perspective: Market pullbacks, corrections, and even bear markets are a normal part of the stock market cycle. History shows that the US stock market has been able to recover from declines and can still provide investors with positive long-term returns. In fact, during the past 35 years, the market has experienced an average drop of 14% from high to low during each calendar year, but still had a positive annual return in more than 80% of the calendar years in this period. Since mid-2015, this general pattern played out. US stocks experienced sharp drops in August 2015, when China devalued its currency; in January 2016, as oil prices dropped; in June of 2016, after the “Brexit” vote; in the run-up to the 2016 US presidential election; and in 2018, concerns about trade rattled investors. Still, during the 3-year period, the market was up more than 30% cumulatively.
- Have a plan that is in line with your goals and risk tolerance and stick to it: Your time horizon, goals, and tolerance for risk are key factors in helping to ensure that you have an investing strategy that works for you. Even if your time horizon is long enough to allow for an aggressive portfolio, you have to be comfortable with the short-term ups and downs you’ll come across. Re-evaluate your investment mix regularly to find the one that feels right for you. Before establishing an investment plan, consider how you define risk, define the right amount of risk for your portfolio by thinking “how much would my portfolio need to fluctuate for it to mean financial devastation for me”. However, be careful with being too conservative; especially if you have a long time horizon since strategies that are more conservative may not provide the growth potential you need in order to achieve your goals. Set realistic expectations, that way, it may be easier to stick with your long-term investing strategy. Once you find the appropriate plan for you, stick to it- it is designed to help you bear the swings in the market in times of high volatility. People who have a written plan with clearly identified goals are much more likely to feel financially confident about their future; a financial plan will also keep you from acting on bad investing tips.
- Don’t try to time the market: Attempting to move in and out of the market can be costly. Research studies from independent research firm Morningstar show that the decisions investors make about when to buy and sell funds cause those investors to perform worse than they would have had the investors simply bought and held the same funds. It is impossible to consistently predict when good and bad days will happen; if you miss even a few of the best days, it can have a lingering effect on your portfolio.
- Diversify and invest regularly: Diversifying is one of the best ways to mitigate volatility. If you invest regularly over months, years and even decades, the short downturns will not have much of an impact on your ultimate performance. If you take a disciplined approach, you will avoid the threats of trying to time the market. But not everything about volatility has negative implications, when investment prices fall, your regular contributions allow you to buy a larger number of shares.
- Take advantage of opportunities: If you are looking to sell some of your investments, a downturn may provide the opportunity for tax-loss harvesting- selling an investment and realizing a loss could help your tax planning. Additionally, if you do a Roth conversion (move money from a Traditional IRA or 401K into a Roth account) in a downturn, it might result in a lower tax bill for the same number of shares sold. Lastly, if volatility has caused your mix of investments to change, you might want to rebalance to get back to your target asset mix, taking advantage of lower investment prices. Take into consideration that all of the above-mentioned strategies are complex, make sure to consult with your Financial Advisor before you make any tax or investment decisions.
- Consider a hands-off approach: To help ease the pressure of managing investments in a volatile market, you may want to consider a professionally managed account for your longer-term goals such as retirement. These different types of accounts offer a range of different services and different costs but, depending on the specific option, may provide professional asset allocation, investment management, and ongoing tax management.
Instead of being worried by volatility, be prepared. A well-defined investing plan tailored to your goals and financial situation can help you be ready for the normal ups and downs of the market, and to take advantage of opportunities as they