How to React to Market Volatility
Those who have been investing for decades know that the market is cyclical. We move from bull market to bear market and back again, often at different intervals but always between the two. The bull periods can be fun and exciting. The bear periods can be uncomfortable.
As of this week, the S&P 500 is down over 10% from the start of January and the Nasdaq Composite Index is down almost 15%. With various factors at play, including continued inflation and an anticipated tightening of fiscal policy by the Federal Reserve, the markets have been nothing short of volatile and we expect that volatility will only continue. It’s hard to believe that in 2021, the biggest “correction” we saw was only 5.2%. 2021 marked a year where seemingly nothing could go wrong—the market only went up.
But, the market doesn’t only go up. In order to reach new highs, we must also experience lows and periods that just don’t sit well. Historically, we have a 10% correction every 2 years. A 20% correction occurs about once every 7 years and, a major “crash”, about once every 10 years. We know that the way an investor reacts during periods of market volatility can make an incredible difference in the overall success of one’s investment portfolio. Rather than trying to predict how long this volatility could last or how deep a correction may go, we want to instead answer the greater question: “now what should one do?”
First, Check Your Plan
Above anything else, you should first ensure you have invested in a manner that aligns with your overall financial plan. You likely have heard us encourage you to first set aside enough money to fund any financial goals you hope to achieve in the next 1-2 years, like buying a home or taking that long-awaited family vacation. By taking that money “off of the table”, you are ensuring that a short-term market correction won’t have a devastating impact on your ability to fulfill your immediate wants and needs.
From there, we recommend you invest in a portfolio that is designed to address your long-term goals. For those that have gone through the financial planning process here at Means Wealth you’ll know that we plan for corrections. We do that because we know they are part of the overall investment process and, therefore, are something that should be embraced and not avoided.
To that end, if anything has changed significantly in your overall financial situation or short- or long-term goals, please reach out to us so that we can ensure your investment allocation aligns with your upcoming financial needs. If your overall financial situation and goals have not changed, we encourage you to hold the course and to rest easier knowing that we are here, every day, watching the markets and watching your portfolios. We know your needs and goals, and are prepared to take action within your portfolio if and when necessary.
Then, Consider the Opportunity
Ben Carlson, author of the popular blog “A Wealth of Common Sense”, recently said it well: “The only reason you get high returns over the long run is because you occasionally experience losses in the short run. This is a feature, not a bug.” What does this mean? Market corrections and bear markets aren’t 100% bad. In fact, they can be an opportunity. For example, if you are regularly saving and investing, market corrections can provide you with the chance to take advantage and invest at lower prices. If you have extra cash, this may be a great time to put that money to work.
In addition, periods of volatility also provide investors the “opportunity” to stay the course. We call it an opportunity because we know it can be hard, but we also know that the way an investor reacts during a correction can do more to one’s overall performance than anything else. We want you to avoid selling at the low and later being forced to buy back at the high. Focus less on timing the market and more on time in the market. Why? Because we know that the investment odds tell us that the longer you’re invested, the better your odds of success. Check out the intro to our 2021 blog “The Odds” to learn more.
That blog includes one of our favorite investment quotes of all time, which is worth repeating now: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” Instead of focusing on this short-term period of volatility, remember to take the long view and remember: this is all part of the process.