As the old trader’s adage goes ‘The stock market takes the stairs up and the elevator down’. The saying does a great job showing how quickly stock prices can move, especially as of late. The stock market can feel like a roller coaster. One day, it’s soaring to new heights, and the next, it’s plummeting. Recent market volatility has likely left many investors feeling uneasy. It’s important to remember that ups and downs are a normal part of investing.
Understanding Market Fluctuations
Recently, we have seen disappointing Q2 earnings from a handful of high-profile technology companies, along with dovishness from Federal Chair Jerome Powell regarding short-term interest rates, followed by jobs numbers showing a potential hiring slowdown. Following this was confusion from the Japanese market, and other international issues, mixed with uncertainty regarding the upcoming election. And just like that, stock prices pulled back. We are currently in the middle of just one example of market volatility.
The stock market is influenced by a complex interplay of factors, including economic indicators, company performance, investor sentiment, and geopolitical events. When negative news dominates headlines, it can create a sense of panic among investors. However, history has shown that market downturns are often followed by periods of recovery.
It’s essential to maintain a long-term perspective. While it’s impossible to predict exactly when the market will rebound, focusing on your financial goals and investment horizon can help you weather market storms.
The Importance of Perspective
To illustrate the normal fluctuations of the market, let’s look at some historical data, as it may be helpful to understand that volatility is a normal part of the investing process. Since 1928, the S&P 500 Index, a broad measure of U.S. stock market performance, has experienced an average of seven 3% pullbacks and at least one 10% correction per year.
While these declines can be unsettling, they are not uncommon. In fact, they are a natural part of the investment cycle.
Investment Time-Horizons: Your Investment Roadmap
A crucial aspect of investing, and being able to stay calm during volatility, is understanding your investment time horizon. This refers to the length of time you plan to hold an investment before needing the money. Your time horizon significantly impacts your investment choices, and when done through sound financial planning, can also provide comfort during market volatility. What you want to avoid is being forced to withdraw money from an investment while it is down. If this is repeated too many times over, it can have a severe impact on your long-term wealth building.
- Emergency fund (3-6 months living expenses) should safely be in a savings account at your bank. Of course, the size of your emergency fund is dependent on you and your situation, but 3-6 months’ worth of living expenses is generally agreed upon by most financial advisors. How secure you are with your job and/or your income, if you are a business owner, among other things, are factors to consider when determining if your emergency fund needs to be larger.
- Short-term goals (less than three years) generally require a conservative approach. You might prioritize security and flexibility over high returns. Options include money market funds, treasuries or government bonds, or high grade corporate bonds. Some retirees, for example, may have five years or more worth of treasuries or bonds to help weather a prolonged financial downturn without worrying about adjusting their lifestyle.
- Intermediate-term goals (three to ten years) offer a bit more flexibility. A balanced approach that includes a mix of stocks and bonds can be suitable. As can a portfolio of ‘blue chip’ stocks that aim to produce consistent dividends, may help during market downturns as the consistent dividend payments can help to offset some of the losses experienced in the overall market. However, it’s essential to understand that while they may be less volatile than the broader market, they are not immune to downturns. This allows for potential growth while managing risk, although it is important to note, this approach may underperform the market during periods of strong growth.
- Long-term goals (ten years or more) provide the greatest opportunity for growth. A more aggressive allocation towards stocks can be considered. Over longer periods, stocks historically have outperformed other asset classes, but they also come with increased volatility.
Remember, these are general guidelines. Your specific circumstances, risk tolerance, and financial goals should always be considered when making investment decisions. The goal is to create a diversified portfolio aligned with your time horizons to help manage risk and optimize returns.
Staying Calm in Turbulent Times
It’s understandable to feel anxious when your investments are declining. However, making impulsive decisions based on fear can lead to costly mistakes. Here are some tips to help you stay calm during market volatility:
- Stick to Your Plan: Avoid making drastic changes to your investment strategy based on short-term market fluctuations.
- Rebalance Your Portfolio: Regularly rebalancing your portfolio can help ensure that your asset allocation aligns with your risk tolerance and investment goals.
- Focus on the Long Term: Remember that investing is a long-term endeavor. Market downturns are temporary, and history has shown that the market tends to recover over time. If you are invested according to your time horizons and when you will need your money, you can feel more comfortable weathering storms.
- Seek Professional Advice: If you are feeling overwhelmed, consider talking with a financial advisor. They can provide guidance and help you make informed decisions.
While it’s impossible to eliminate market risk, understanding the historical patterns of market behavior can help you develop a more resilient investment approach. By maintaining a long-term perspective and staying focused on your financial goals, you can strive for achieving investment success.
