Dealing with Market Volatility

Recently the markets have been choppy, resulting in renewed anxiety for many of you. While it may be difficult to remain calm during a substantial market decline, it is important to remember that volatility is a normal part of investing. Additionally, for long-term investors, reacting emotionally to volatile markets may be more detrimental to portfolio performance than the decline itself.

The stock market tends to reward investors who can weather the ups and downs and stay committed to a long-term plan. As shown in the chart below, which represents the annual returns of the US Stock Market, investors experienced positive returns in 75% of the calendar years from 1926 to 2021. In addition, more than two-thirds of the down years were followed by up years. The most recent example was a 5.0% loss in 2018, followed by a 30.4% gain in 2019.

Return in 1970 was 0.002%. Past performance is no guarantee of future results. Investing risks include loss of principal and fluctuating value. There is no guarantee an investment strategy will be successful. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. In US dollars. CRSP data provided by the Center for Research in Security Prices, University of Chicago. The CRSP 1–10 Index measures the performance of the total US stock market, which it defines as the aggregate capitalization of all securities listed on the NYSE, AMEX, and NASDAQ exchanges.

 

If one were to try to time the market in order to avoid the potential losses associated with periods of increased volatility, would this help or hinder long-term performance? It is unlikely that you can successfully time the market, and if you do manage it, it may be a result of luck rather than skill.

Further complicating the prospect of market timing being additive to portfolio performance is the fact that a substantial proportion of the total return of stocks over long periods comes from just a handful of days. Since you are unlikely to identify in advance which days will have strong returns and which will not, the prudent course is to remain invested during periods of volatility rather than jump into and out of stocks. Otherwise, you run the risk of being on the sidelines on days when returns happen to be strongly positive.

The chart below illustrates the performance of the S&P 500 Index from 1990 to 2021 and shows the importance of staying invested. Missing just a few of the market’s best days can significantly impact cumulative returns. Staying invested and focused on the long term helps to ensure you’re in a position to capture what the market has to offer.

 

 

Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. In US dollars. For illustrative purposes. The missed best day(s) examples assume that the hypothetical portfolio fully divested its holdings at the end of the day before the missed best day(s), held cash for the missed best day(s), and reinvested the entire portfolio in the S&P 500 at the end of the missed best day(s). Annualized returns for the missed best day(s) were calculated by substituting actual returns for the missed best day(s) with zero. S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. “One-Month US T- Bills” is the IA SBBI US 30 Day TBill TR USD, provided by Ibbotson Associates via Morningstar Direct. Data is calculated off rounded daily index values

 

While market volatility can be nerve-racking, changing your long-term investment strategies in response to short-term declines could prove more harmful than helpful. By adhering to a well-thought-out investment plan, ideally agreed upon in advance of periods of volatility, you may be better able to remain calm during periods of short-term uncertainty.