Market volatility can increase or decrease depending on where we are in the business cycle. Here’s why this shouldn’t worry long-term investors. Big market declines can be unnerving for investors, often triggering emotions of fear and concern, particularly if they occur unexpectedly or in a very brief period of time. However, such declines are historically not unusual.
Market volatility fluctuates based on where we are in the business cycle and due to external events that heighten risk and threaten growth. It is a normal feature of markets that investors should expect. When markets sell off, investment returns will head lower in ways that can leave investors with material losses. Does that mean you should try to sell when the market is “high” or sell if it starts to fall in order to reduce the potential for that kind of unpleasantness? Not necessarily. Here’s why:
Common Investing Mistakes
It’s extremely difficult to predict the timing of a market downturn with the accuracy needed to profit from such a prediction. In other words, it is easy to get such a prediction wrong, which can be costly.
Investors who radically reposition their stocks in an attempt to catch the tip of a market top reliably miss out on gains more than they prevent losses and generate excessive transactions and potential tax costs along the way.
While “buy low, sell high” may sound like an investor’s mantra, the challenge of getting it right means it rarely is a good way to make decisions in practice. Indeed, individual investors who “sell high” and go to cash waiting for a market downturn to come and go, often lose patience as stocks continue to go up. This results in them missing out on gains rather than preventing losses.
That costly mistake is the reciprocal of another, wherein panicking investors sell their holdings during a market selloff, potentially locking in losses as stocks rebound while they remain on the side-lines. The prevalence of these value destroying behaviours helps to explain why individual investors as a group tend to dramatically underperform market benchmarks.
Consider Your Goals
Another factor to consider is how you’re doing relative to your financial goals. Reviewing your goals, priorities and reassessing your portfolio based on where you stand is a good habit to get into. For instance, if you are saving toward a goal and have made good progress, it may make sense to take on less risk, regardless of the market outlook. This is for two reasons:
First, it intuitively makes sense to take less risk when you have more to lose than to gain. Second, for additional peace of mind that your progress won’t be jeopardized, you may desire the lesser uncertainty that can come from a more conservative blend of stocks, bonds and cash.
It’s best to avoid short-term thinking and remember that investing is a long-term proposition. Keeping your eye on the horizon is the best way to think as an investor.
The value of investments, and any income from them, can fall and you may get back less than you invested. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Neither simulated nor actual past performance are reliable indicators of future performance. Information is provided only as an example and is not a recommendation to pursue a particular strategy.