6 points that can help you feel more at ease with market volatility
Although market uncertainty might make you feel jittery, keeping your investment cool is critical to your financial success. While it's hard to watch your portfolio value fluctuate, remember these six things before acting out of emotion:
1. This. Is. Normal.
In the same way that muscle fatigue is part of any intense training program, volatility is part of investing. When stock prices steadily rise with little fluctuation, it's easy to forget that volatility is incredibly common.
It’s important to remember what's happened in the past to help understand where the market may be headed. Every year or so the market dips. In fact, the S&P 500 experiences about one correction of 10% or more annually, and has historically recovered. The best part may be what happens after these dips.
After a correction, average returns exceeded 23% over the next 12 months.1 And while we haven't faced today’s specific economic and geopolitical challenges before, we've faced others, and in the end, the turbulence ended well.
2. Patience is typically rewarded
Investing in the stock market gives you a chance to profit from innovation, economic progress, and compound growth. But to get results, you need patience and time. On this note, it's helpful to keep the market’s performance history top-of-mind:
Since 1990, the Dow Jones Industrial Average has achieved 9.5% annualized gains, including dividends. Even if you were to look at shorter time horizons since 1950, the S&P 500 has risen 83% of the time across a five-year horizon, 92% across 10-year periods, and 100% of all rolling 15-year periods.2
And while history can't predict future performance, it can give you an idea of what could happen if you try to take a shortcut or “panic sell” when markets are fluctuating:
From 1990 to 2020, the S&P 500 Index’s annualized gain was 7.5% (excluding dividends), but the average equity investor’s return was only 2.9%.3 Why the 4.6% gap? Because when stock prices begin to fall, many investors given in to fear, which drives them to sell their investments – even though it may not be in their best interest.
It’s the investors who are patient and can maintain their cool on the bumpy road of volatility who are most often rewarded. As Warren Buffet once famously said, investing in the stock market is “a way for the impatient to transfer money to the patient.”4
3. Market timing doesn’t work
Selling on the market slide and re-entering the market when you think it's safe is a natural way to try to manage your portfolio against additional losses. And while it may be tempting to time the market this way, it could be a costly mistake.
It's impossible to predict when a stock or the market as a whole will peak or bottom, even if you're an expert. In a market decline, if you sell in fear of losing more, you'll then have to figure out when to jump back in, which is equally difficult. Plus you risk locking in your losses if you re-enter at the wrong time. For example, between 1990 and 2020, the biggest gains (and losses) in the market happened within days of each other, which means you didn’t have to be out of the market for long to miss out on the upswing.2 Because even in "bad" markets, there are a lot of good days, and you want to be “in” for those days.
4. Opportunities abound
Make sure to look at volatility from both buying and selling angles. When stocks decline, you can “buy in” at a lower price and potentially make money when the market rights itself. When the decline is part of an overall cycle, this means stocks are trading below their intrinsic values, which means they offer an improved price-to-earnings ratio.
5. There are ways to enjoy a smoother experience
Dollar-cost averaging can help reduce the overall impact of price volatility and lower the cost per share of your investments. You’re likely already using this strategy with your 401k. Dollar-cost averaging occurs when you contribute the same amount of money into a stock at regular intervals, regardless of the price per share on that particular day. So, rather than trying to get in and out at the “right” time, dollar cost averaging can be a good strategy to help you avoid timing mistakes, remove emotion from your decision-making process, and keep your long-term goals in mind.5
6. Remember: you’re not alone
In times of market volatility and economic uncertainty, remember that you’re not alone. Consult your financial advisor for additional perspective and context, and review your investment strategy from a life-goals perspective to ensure you’re headed in the right direction to pursue your financial goals.
1 Source: LPL Research, Ned Davis Research, FactSet 4/29/22
2 Source: LPL Research, FactSet 4/29/22
3 Source: LPL Research, Bloomberg, DALBAR, ClearBridge Investments 6/30/21
4 Source: “Winning In The Market With The Patience Of The Wright Brothers And Warren Buffett,” Forbes, (January 2018).
5 Source: https://www.forbes.com/advisor/investing/dollar-cost-averaging/
This material was prepared by LPL Financial, LLC.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
Average investor return is based on an analysis by Dalbar Inc., which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. Returns are annualized (and total return where applicable) and represents the 20-year period to match Dalbar’s most recent analysis.
With dollar cost averaging an investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.