Should You Just Do Nothing When Markets are Volatile?
These are some uncertain times, for sure! Regardless of which side of the political aisle you are on, you probably agree that we’re on a wild ride and it seems to be far from over. Increasingly, we see signs of the uncertain times in economic indicators, including the stock market.
Stocks are up! Then crashing. And... up again!?
Changes in the market are normal and should be expected. But when volatility happens—because of political changes, economic downturns, war, health crises, or natural disasters—it can be tempting to react, make educated guesses about what to do, or worry that you're missing out on an opportunity. When anxiety levels are high, it's important to keep things in perspective by concentrating on the long-term plan and objectives you've set for yourself. We believe that the best course of action may be to take no action at all, particularly if you already have an effective strategy for achieving your financial goals over the long run.
To help you take volatility in stride, remember: we've been here before. Volatility is nothing new.
For example, from the Arab oil embargo and Y2K to Hurricane Katrina and Brexit, here are some of the global events that have affected the market over the past 30 years. The chart shows that markets have always rewarded discipline.
Market declines present opportunities for long-term investors.
As the fall in global market prices in 2018 demonstrates, maintaining one's line of action can be profitable, while deviating from it can be expensive.
Diversification helps your portfolio handle the ups and downs of the market.
The goal of a diversified portfolio is to invest in the best performing asset classes each year. History has shown that it's hard to know for sure which asset class will do better on any given day, month, year, cycle, etc. The chart below shows how a diversified portfolio, which is made up of stocks and bonds, compares to individual stocks and how fast investors got their money back after the 2008–2009 financial crisis, depending on how they were divided up.
Focus on the right time horizon
Research on how investors think has shown that your time horizon tends to get shorter as market volatility goes up. When you have easy access to information about daily changes in the markets or your portfolio and a lot of scary news, it's easy to make bad investment decisions. The key is to keep your attention on the right time frame. If you have 20 years until you retire, the day-to-day and week-to-week changes don't make much of a difference in the long run. Don't let short-term events drive your long-term choices. In other words, think about the long term.
So, the ultimate question: ‘Should you hold your investments during market volatility?’
Essentially, the answer depends on what you invest it in. If you have a lot of high-risk investments, probably not. Because investment losses are exponential. Therefore, when your portfolio declines, it becomes increasingly difficult to recover. It is certainly easier to avoid losses than to achieve gains. As the guru of investing, Warren Buffet says: "Rule number of investing, don't lose money. Rule number two, see rule number one."
Therefore, if you have an aggressive investment strategy, you may wish to reassess your portfolio. While it's now volatile. If you're investing in things like a Robo-Advisor, you should assess the risk allocation and whether or not you can hold the investment for the long term. Currently, Robo-Advisors and many traditional asset allocations use bonds as a buffer against risk. But, I believe we are entering an era in which bonds will have limited headroom at risk.
We are currently experiencing the worst bond market in 100 years. Therefore, if your portfolio consists of stocks and bonds and that is your risk protection, you currently have no risk protection. So, it may be important to consider modifying your portfolio. If you're in it for the long haul, by which I mean decades and not six months, you should be able to weather the storm. But again, losses are exponential. Therefore, as your portfolio continues to decline, it will become increasingly difficult to recover. So, the first step entails determining whether or not your portfolio is robust enough to withstand losses.
Even though nothing is for sure, market volatility is a given.
Try to remain calm. Stay focused on your financial goals and work with one of our expert advisors to make a long-term plan. This will help you feel less stressed, keep your money safe, and ready to take advantage of the next bull market!
Interested in connecting with us?
Your Vincere Wealth Advisor will work with you to:
✔️ Create an investing strategy that is based on financial science and is suited to your needs, goals, and risk tolerance.
✔️ Construct a portfolio along the dimensions of expected returns, taking into account your risk tolerance.
✔️ Take steps to minimize the impact of taxes.
✔️ Increase investment value, control costs, and keep an eye on turnover all while retaining a wide degree of diversification.
✔️ Maintain discipline during market dips and swings.
Ready? Simply set up a FREE 1:1 session with us by clicking the link here to learn more about how you can make your money work for YOU.