Volatilty, Now What?
Stock market volatility, while normal, is never comfortable. Periods of market volatility cause stress, anxiety, and worst of all, doubt. Doubt is what causes investors to question their previous plan or strategy, if one was present, and doubt can turn into panic, and panic into poor decisions.
Nevertheless, markets are volatile, and markets do fluctuate. That means that although the long-term track of the stock market may be positive, we do experience times when the market is negative. How you respond during these times will likely have a massive impact on your level of investment success.
Here are four things to remember during times of market volatility:
1. Volatility is Normal
If you’ve been an investor for any length of time, you have probably experienced several periods of market volatility. If not, it’s important to understand that these events are normal and should be expected.
According to The Capital Group, declines of 10% or more in the S&P 500 Composite Index occur about once per year and last for 114 days, with the last occurrence being in December of 2018.1 The Capital Group also says that declines of 15% happen about once every 4 years and declines of 20% or more happen about once every 7 years.1
As investors, if we can understand this and set our expectations properly up front, we can have a better overall investment experience, complete with less surprise, angst, and financial stress.
2. The Financial Media Are Not Fiduciaries
Many investors aren’t privy to the facts and history of the stock market and only know what they hear or read in the media. However, allowing the financial media to influence your personal investment decisions is a recipe for disaster.
We must all understand that the pundits and so-called “experts” on major media networks are not fiduciary advisors. They are not incentivized to help you become a successful investor. In fact, I would argue they are incentivized to do the opposite through the manufacturing and spreading of fear.
Fear drives ratings. Fear makes us act irrational. It paralyzes us and makes us stay glued to our televisions. Fear is the most powerful tool the media has to use, and they use it often.
In nearly of decade of working as a financial advisor, I’ve seen headline after headline about multiple crises we’ve supposedly faced as a global society. In recent history alone, there has been the Coronavirus, the China-US “Trade War,” nuclear tensions with North Korea, the Presidential Election of 2016 (and 2020), naturals disasters, wars, and the list goes on.
The media will do everything in their power to get you to think that “this time is different.” However, all those events, while being sold as being “bigger, scarier, and worse” than other world events, have not stopped the world market to move onward and upward.
3. Follow Your Own Advice
I’ve found is that many people I talk to about investing seem to know, or at least say, the right information. In my conversations with investors, people say they know the markets fluctuate, they know that you can’t time the market effectively, they know they need to be diversified, and they know they should “buy low and sell high.”
However, when volatility arrives, investors suddenly want to abandon what they know to be right. They start to wonder if they should “exit” the market by selling and investing in bonds or cash for a brief period, which is an example of trying to the market.
Trying to avoid temporary market declines can often lead to missing out on the upside that you could receive by staying invested. For these investors, loss doesn’t appear as a loss of principal, but a loss of opportunity.
My general advice to investors is to follow your own advice. Don’t try and time the market and understand that the market does fluctuate. Don’t try to avoid it. Embrace it.
4. Remember Your Time Horizon
A timeless staple of investing is you must always remember your time horizon and invest accordingly. If you are a long-term investor, then choose an investment or mix of investments that is appropriate for that time frame, like perhaps a diversified stock portfolio.
If you are planning to be invested for 6 months and will then need to withdraw your investment for a down payment on a home, invest in something designed for shorter time periods, not stocks.
Remembering this key thing can be very helpful during a market downturn, when people may get the urge to sell their stocks at a loss, which would be an irrational decision.
Consider your home. Let’s imagine you purchase your home for $200,000, but after three years, the same home is appraised at $100,000 due to a local real estate catastrophe. While that may be a hard pill to swallow, would it change your lifestyle? Probably not. You certainly wouldn’t be rushing to sell after such a poor appraisal.
In fact, I would guess that you’d just stay put and understand that because the home has a long-term use, there is really no need to do anything different, except maybe go and purchase neighboring real estate at a low price!
Overall, when market volatility arrives, investors ask themselves, “Should I be doing something different?” If that is you, that question tells me you need to revisit your original investment plan. If your plan was created with the assumption that volatility would occur, then why would your plan not be okay now? If you never created a plan, then it’s paramount to do so, and enlisting the help of a qualified professional to help you would be a good first step.
Ultimately, applying these tips during times of marketing volatility should help you navigate future market volatility.
1 What Past Market Declines Can Teach Us. The Capital Group. https://www.capitalgroup.com/individual/planning/market-fluctuations/past-market-declines.html
Joe Allaria is a Partner and Wealth Advisor with CarsonAllaria Wealth Management. For his numerous articles, Joe has been featured in the Wall Street Journal, USA Today.com, Yahoo Finance, Nasdaq.com, CNBC.com, and Investopedia. Joe is also a CERTIFIED FINANCIAL PLANNER™ professional, which identifies those individuals who have met the rigorous experience and ethical requirements of the CFP Board, have successfully completed financial planning coursework and have passed the CFP® Certification Examination.
CarsonAllaria Wealth Management does not provide tax or legal advice. All articles and posts are provided by CarsonAllaria Wealth Management (CAWM or firm) for informational purposes only. By accessing or otherwise using this Article, you agree to be bound by the terms and conditions set forth below. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the Article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the Article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment strategy. In addition, this Article shall not constitute the provision of personalized investment, tax or legal advice, and investors shall not assume this Article serves as a substitute for personalized individual advice. Information contained in this Article may have been derived from third-party sources that CAWM believes to be reliable; however CAWM does not control such information and does not guarantee the accuracy or timeliness of such information and disclaims all liability for damages resulting from such sources. Links or references to third-party websites are provided as a convenience and do not constitute an endorsement by CAWM, and the Firm is not responsible for the content of any such websites. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.