Take Time to Revisit These Important Investing Facts
Recent market volatility has many investors worried about their investment performance, but exiting the market during periods of volatility can cause irreparable damage to your long-term investment returns. Remember that volatility, even sharp downturns, are a natural part of the investment cycle. In fact, volatile periods, such as the one we’re currently experiencing, present unique opportunities to position your portfolio for future success.
As we weather the current wave of volatility, take a deep breath and remember the following important investing facts.
#1 – Market volatility creates opportunity.
While it’s very difficult to time the market, periods of volatility provide an opportunity to purchase shares of equities at lower-than-normal prices. For example, making additional investments when the market drops may allow you to purchase a stock that traded at $50 a short time ago for $40, a 20% “discount.” Doing so lowers your cost per share and can help improve your portfolio’s overall return when the market rebounds again.
One great way to take advantage of lower prices is through dollar-cost averaging, which is the process of investing an equal amount at regular intervals. By continuing to invest regardless of an asset’s current share price, you’re able to purchase more shares when prices decrease and fewer shares when prices are high.
#2 – Remaining invested smooths out the volatility of returns.
There’s no doubt that short-term market fluctuations can be stressful. However, portfolio volatility has a long history of lessening over time, even across various investment types. In other words, remaining invested over the long term is one of the best ways to reduce portfolio volatility (as illustrated by the following chart).
#3 – Missing out on the best days in the market can be costly.
When speaking about market volatility, Creative Planning’s president and CEO, Peter Mallouk, often asks audience members the question, “What is the one thing all bear markets have in common?” The correct answer is, “They all eventually end.”
There’s never been a time in history when the market hasn’t eventually recovered from a downturn. Yes, sometimes it takes years for the recovery to occur, and the rebound may not coincide with your investment timeline, but the markets will eventually rise again. However, if you take your money out of the market, you’ll realize any portfolio losses and miss out on an opportunity for future growth.
Consider the following chart, which illustrates how missing just a few days in the market over many years can greatly impact a portfolio’s performance.
You’ll have a much better chance of achieving your long-term financial goals if you resist the urge to cave to emotionally driven investment decisions.
#4 – Diversification offers stability.
As illustrated in the chart below, the performance of various asset classes varies greatly from year to year, which is why it’s important to spread out your risk across multiple asset classes and investment types.
A diversified portfolio can also help you avoid the severe downside of market fluctuations. To dampen volatility over time, build a diversified portfolio that includes various asset classes, sectors and geographic regions.
Annual Returns for Select Asset Classes
Click here for a larger interactive version of this chart
#5 – Fearful investors are their own worst enemy.
Fear-driven selling is one of the biggest mistakes investors make during periods of market volatility. It’s very difficult (we’ll even go so far as to say it’s impossible) to time the market. Most investors who try doing so end up missing out on significant growth opportunities.
One of the realities of human nature is that, when under pressure, our fight-or-flight instincts often kick in, and we don’t always make rational choices. Although volatile markets aren’t quite the same as being attacked in the wild, our natural response can be similar. In the world of investing, this fight-or-flight instinct can be a recipe for bad decisions, both during good times and bad. Instead of responding based on fear, remain steady and calm. Now may be a great opportunity to take advantage of dollar-cost averaging, harvest tax losses and position your portfolio to take advantage of a future recovery.
#6 – News pundits profit from panic.
Most of us know the main goal of media news outlets is to drive ratings. Yet, during periods of uncertainty, many of us rely on news websites, social media feeds and television programs to guide our reactions. Unfortunately, news headlines and talking points are often exaggerated in order to motivate more people to click or tune in.
If you find that disturbing news headlines cause you to lose sleep during periods of market volatility, it may be wise to limit your exposure. Take a break from your regular programming to watch a movie, go for a walk or read a book. If you’re really worried, reach out to your wealth manager for reassurance.
How to invest during periods of market volatility
As with so many financial planning issues, the best way to invest during periods of market volatility depends on your particular situation. For example, an investor who plans to retire in five years will take a different approach than a 25 year old just beginning to invest. A solid strategy is to work with your wealth manager to develop an overall portfolio allocation that’s in line with your financial goals, current situation, risk tolerance, time horizon, retirement income needs, estate planning goals, etc.
At Creative Planning, our experienced teams start by helping you develop a custom financial plan specifically designed to achieve your goals. We then use this plan as a blueprint to guide all portfolio decisions. The result is a custom portfolio built around your needs that’s designed to weather market volatility.
If you’d like help successfully navigating this current period of market volatility, please schedule a call with a member of our team.
