Most investors will encounter a rocky market at some point in the stock and bond market. But if you have a long-term strategy in place, you can stick with your plan when it gets rough and avoid making potentially costly moves out of panic.
Historically, U.S. stocks have seen three downturns of 5% each year, one correction of 10% each year, and one correction of 15% every three years. While such market downturns may be unsettling, history also shows that markets recover and deliver long-term gains. Looking back over the longer term, the trend for the equity market has traditionally remained up.
A recent Fidelity analysis looked at 401(k) investors who completely moved out of stocks during the financial crisis of 2008–09. In the 10 years following the downturn (as of December 2019) the accounts of those investors grew 210%, largely because they continued to contribute to their 401(k). However, those who stayed invested in stocks and weathered the downturn saw their account balances rise by 356%, driven by market growth, their own contributions, and any employer contributions.
Mixing It Up
Diversification may lower a portfolio’s risks by not overexposing an investor to any one type of investment or asset class. Having a broad mix of investments, stocks, bonds, cash and other assets across sectors and asset classes can help you manage volatility. Diversifying the investments within each asset class can help offset risk even more.
While diversification does not ensure a profit or guarantee against loss, holding some investments that zig when others zag can help smooth out the ride a portfolio delivers—helping investors stick with their strategy and stay on track to meet their goals. The mix of stocks, bonds, and cash in your portfolio should be driven by your investment time horizon and risk tolerance, not what might happen with factors outside of your control. Also, allocations change with market movements, so rebalance regularly to return to your target allocation.
Timing the Market Is Tricky
Timing the market, a strategy that attempts to anticipate and take advantage of price fluctuations—buying at lows and selling at highs predicted by technical indicators—can maximize returns but is very difficult to do consistently. Risks include missing the best market days (which often follow downturns) and incurring high transaction costs and taxes.
No one, not even experts, can consistently time the market. Attempting to do so is risky, often leading to missed opportunities and higher costs. Better than timing the market is time in the market; staying invested tends to produce better long-term returns.
Research from Charles Schwab shows that the cost of waiting for the perfect moment to invest—and essentially staying out of the stock market—typically exceeds the benefit of even perfect timing. Studies show that missing just the 10 best days in the market over 30 years can cut returns in half.
Taking the Long View
History has shown that time in the market tends to lead to more successful outcomes over the long term. This is especially true during volatile periods that see large, outsized movements in either direction.
Volatility tends to make investors feel uncertain and fearful about what could happen next, and that often prompts them to make rash decisions that aren’t ultimately in their best interests. The best thing to do when the markets get turbulent is to take a step back and ask yourself what your purpose for investing was in the first place.
Having a well-defined vision of your goals laid down on paper. If you haven’t written down your goals, now is a great time to do it.
If you must trade, don’t trade using market orders within the first or last 30 minutes of the trading day, when volatility tends to be highest and spreads at their widest. If you are investing regularly, continue to do so with a long-term view. Keep in mind that volatility can provide opportunities to buy quality assets at discounted prices.
Conclusion: Stay Focused
The economic ramifications of the geopolitical events in the Middle East war continue to remain unclear. The fighting, which erupted at the end of February sent crude prices spiking and could accelerate a “flight to safety” that lifts U.S. Treasuries and gold. Volatility has surged, leading to more dramatic swings in asset prices. Because it’s far too soon to say with confidence how the global economy will emerge, investors should remain focused on fundamentals and longer-term potential, not headlines and avoid overreacting. We will continue to monitor events in the Middle East, and the 3 most important aspects of this war are the energy infrastructure, transportation of energy products, and the duration of the war.
Navigating uncertainty and extreme volatility is difficult. News headlines may be alarming, but long-term investors have weathered scary times before. Also, it’s difficult to predict the downstream result of any given policy change in advance.
Rather than reacting to short-term market moves, it’s important to keep the big picture in mind and stay focused on your long-term goals and make sure your asset allocation is appropriate for your time horizon and risk tolerance.
As always, if you have any questions about this report or any other questions, please reach out to Bowen Asset at info@bowenasset.com or (610) 793-1001.
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