By Jane Young, CFP, EA
With high inflation, the threat of substantial increases in short-term interest rates, the likelihood of a deeper recession, the war in Ukraine and high oil prices, it is only reasonable for investors to be concerned about volatility in the stock market. Periods of instability create a sense of uneasiness and you may be wondering if you should continue investing in the market. Being a successful investor often comes more from what you don’t do than what you do. During times of extreme volatility or a market correction the best course of action may be doing nothing.
Assuming you have created an investment plan that incorporates your time horizon and risk tolerance, have faith in your plan and stay the course when the market drops. The money you have positioned outside of the stock market allows you to ride out a market correction without selling your stock positions. Do not deviate from your plan unless your situation has changed, and you have good reason to do so. Market corrections are normal and to be expected.
We know the stock market fluctuates and that historically, every downturn has been followed by an increase in the market. Over the long-term the stock market has always trended up and has significantly outperformed cash and bonds.
Countless factors impact market volatility including microeconomic conditions, politics, government policy and many
issues we have not even imagined. You cannot possibly predict and incorporate all possible changes into your portfolio. Even the best investment managers are unable to accurately predict short-term movements in the market.
Investing for an extended period of time, is more important than knowing when to invest. When you pull out of the market, often due to fear, you miss the gains when the market rebounds. Studies have shown that people often stop investing after the market has fallen and do not return to market until the market has already bounced back. This locks in losses and results in the undesirable effect of selling low and buying high.
Additionally, to achieve long-term financial success you need to be invested on the market’s best days. The best days usually follow the markets largest drops. According to J.P. Morgan, over the 20-year period ending December 21, 2021, the S&P 500 returned an annualized 9.52%. If you were out of the market on the ten best days during that period, your return would have dropped to 5.33%.
To stay the course, focus on the big picture and remind yourself that stock is for the long-term and your portfolio is designed to withstand normal market cycles. Avoid continually monitoring the market and obsessing about the short-term news cycle. Successful investing requires patience and discipline which is difficult to maintain if you are hyper focused on the daily changes to the market and your portfolio.Once you have a well-constructed portfolio, other than annual rebalancing to maintain diversification, step back and let it work for you.