3 Reasons to Avoid the Urge to Pull Your Money Out of the Market
During periods of economic uncertainty, it can be tempting to throw your hands up in an “I give up!” gesture and pull your money out of the market. Sometimes, it just seems easier to hoard cash rather than continue stressing about fluctuations in your investment returns.
If you ever get to that point, call you wealth manager (who will talk you down off the ledge!). While market volatility can be unsettling, taking your money out of the market altogether can have a significant negative impact on your long-term financial security. Following are just a few reasons it’s important to stay invested in the financial markets throughout periods of volatility.
#1 – Time in the market smooths out the volatility of returns.
There’s no doubt that short-term market fluctuations can be stressful. However, portfolio volatility lessens 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).
#2 – Fearful investors are their own worst enemy.
Fear-driven selling is the single biggest mistake 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.
When speaking about market volatility, Creative Planning President and CEO Peter Mallouk often asks audience members the question, “What is the one thing all bear markets have in common?” The 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.
#3 – You may miss out on dollar-cost averaging opportunities.
By taking your money out of the market during periods of volatility, not only are you missing out on opportunities for investment growth but you’re also missing out on a great opportunity to take advantage of dollar-cost averaging. Dollar-cost averaging is the process of investing small amounts of money at regular intervals over a long period of time. As prices decrease, you’re able to purchase more shares with the same amount of money. As prices increase, you’re able to purchase fewer shares with the same amount of money. This practice can help lower your average per-share price over time and keep you from being overly weighted in an inflated investment.
When you take money out of the market, you lose an opportunity to purchase investments at a “discount” to their normal price.
There are several ways your wealth manager can help you successfully manage market volatility without you losing sleep over your returns. One of the most important investment strategies is to maintain a diversified portfolio in order to spread your risk out across multiple asset classes, investment types, sectors and geographic regions. A properly diversified portfolio can help smooth out returns and allow market fluctuations to work to your advantage.
Ultimately, one of the best ways to remain invested in a volatile marketplace is by having a financial plan in place to help keep you on track toward your specific financial goals, regardless of market volatility.
