Investors today are navigating uncharted waters, amidst market volatility in a pandemic world, and such uncertainties tend to result in emotions running high.
However, investors need to understand that market volatility is part of investing, and learn how to live with it. Market downturns may happen frequently, but they don’t last forever
To be able to navigate volatility and potentially emerge unscathed, it is important that investors keep three strategies in mind:
Stay Calm
Keep a long-term perspective and tune out the noise.
Diversification Matters
Diversification may reduce overall volatility and provide a smoother ride through bumpy markets.
Remember Your Strategy
While it may be tempting to pull out of the stock market during volatility, it is important to stick with an investment strategy.
When markets are choppy, it is natural for emotions to run high.
This chart is for illustrative purposes only and does not reflect the performance of any Franklin Templeton fund. Past performance does not guarantee future results. Source: © Morningstar 2021. Franklin Templeton Capital Market Insights Group. Average annual return from 12/31/2010-12/31/2020. Indexes are unmanaged and one cannot invest directly in an index. Index returns do not reflect any fees, expenses or sales charges.
Investors need to understand that market volatility is part of investing.
Let’s look at three strategies that can help investors live with market volatility.
First and arguably the most important concept of investing is to keep a long-term perspective.
When faced with volatility, acting on fear and pulling money out of the market may divert investors from their long-term goals. While past performance cannot guarantee future results, keeping a long-term perspective can help during times of volatility.
The perception of a portfolio would change depending on the monitoring period. A way for investors to stay calm and not act on emotions is to watch their portfolio less.
Diversification is a staple of investing and may reduce a portfolio’s overall volatility and provide a smoother ride through bumpy markets.
This chart shows how various asset classes performed on a year-by-year basis over the last 15 years. No asset class has consistently offered the best return year in and year out, so investors need to have a diversified asset allocation plan.
Keeping assets properly allocated across several asset classes helps reduce overall volatility and improves your chances to earn more consistent returns over time. This chart shows how the strategy that allocates investments across several asset classes performs relatively better.
Review that plan when emotions are running high.
As markets move up and down, so will the cost of your investment. Committing a fixed amount of money at regular intervals to an investment, a.k.a dollar cost averaging, can help reduce anxiety about the investment process.
This chart shows the 20 worst trading days and the 20 best trading days of the S&P 500 index over the last 20 years. In many cases the best trading day immediately follows the worst trading day illustrating how difficult it is to attempt to time the market.
Just as many investors are slow to recognize a retreating stock market, many also fail to see an upward trend in the market until after they have missed opportunities for gains. An investor who stayed fully invested and didn’t miss any of the best days would have earned a significantly higher return than those who missed the best days.
1. Markets have tended to reward patient investors over long periods of time.
2. Emotions affect decision-making ability.
3. Stay calm, diversification matters, and remember your strategy.
