Dealing With Market Volatility
The past three months have seen a lot of volatility in the stock markets and many are wondering what is to come and what they should do. For most people, the best thing to do is nothing at all.
Triggers for market volatility can vary wildly but you need to remember that a five to ten per cent correction will typically occur three times per year. Yet each time we see volatility creep up, investors start to question their current investment mix and wonder if there’s something they should do.
For this week’s column, I wanted to provide a few tips on how to handle market volatility.
1) Keep Perspective – As mentioned above, downturns and volatility are normal and typically short lived. In the past three years alone, we’ve seen sharp drops in Q3 of 2015 (China devalued their currency), Q1 of 2016 (oil prices dropped), Q2 of 2016 (Brexit vote), Q3 of 2016 (runup to US election) and twice so far in 2018. The cumulative return of US markets over this same three-year period is +30 per cent.
Panicking every time the market goes down or worse, actually making changes to your plans or going to cash makes about as much sense as organizing a parade to celebrate every time the market has a period of good growth.
2) Don’t Time the Market – Nobody has a crystal ball, and nobody can say for sure when the markets will have their next spike or drop. Attempting to time the market by moving in and out can be costly. Research studies have repeatedly shown that most people who try and buy and sell regularly do far worse than those who simply leave their money invested all along. Missing even a few of the best market growth days can eat up all the gains in a given year.
For example, if you invested $10,000 into the S&P 500 index in 1980, you would have roughly $780,000 today. By missing out on only the five best days during that entire 38-year period, your balance would be only $458,000 instead. And if you missed the best 50 days, you would have a little over $62,000 for all your efforts.
3) Invest Regularly – By putting regular bi-weekly or monthly contributions into your retirement portfolio, you can actually benefit from these market drops. Whenever the market dips, your regular contributions are buying more shares/units at a discount which allows you to purchase a larger quantity.
The same strategy works well for many withdrawal plans during the retirement stages as well. I often hear from people wondering when in the coming year is best to pull a large lump sum out of their accounts. Without that magic crystal ball, there is no way to say for sure when will work best and many are better off taking regular withdrawals spread throughout the full year.
4) Be Comfortable with Your Plan – If you become nervous or fearful each time the market goes down, you may not be in the right investments. Typical factors such as time horizon and goals help determine what level of risk your investment mix should hold but you also need to consider your true risk comfort and personality type.
You may think that a certain risk level is necessary to reach your goals, but better self-evaluation is key to making sure you can live with that level of risk. For some, adjusting your goals may be necessary to make them attainable with a lower risk portfolio.
Spending eight weeks each winter in Hawaii sounds like a nice retirement goal but so does sleeping soundly each night instead of staying up worrying about the latest market pullback. You need to develop a plan that you can sleep comfortably with…
A well defined and structured investment plan tailored to your goals and financial situation should easily handle volatile periods. If in doubt, use the current market volatility as a reminder to review your own investment plans and make sure they’re properly diversified and suitable for your risk tolerance.