How to Handle Volatility

Apr 2, 2024

Market volatility can increase or decrease depending on where we are in the business cycle. Learn how to recognize common investing mistakes and stay focused on your long-term financial goals.

Author
Dan Hunt
Dan Hunt

Key Takeaways

  • Market volatility is a normal feature of markets that you should expect.
  • Trying to predict the timing of a market downturn is extremely difficult and can lead you to miss out on potential gains.
  • Panic-selling during a market selloff may cause you to lock in losses as stocks potentially rebound while you remain on the sidelines.
  • Working with a Financial Advisor can help you avoid short-term thinking and focus on long-term investing strategies.

Big market declines can be unnerving for investors, often triggering emotions of fear and concern, particularly if declines occur unexpectedly or in a very brief period of time. However, such declines are historically not unusual. Market volatility fluctuates based on where we are in the business cycle and due to external events that heighten risk and threaten growth. It is a normal feature of markets that you should expect. When markets sell off, investment returns will head lower in ways that can leave your portfolio with material losses. 

 

Does that mean you should try to sell when you think the market is “high” or sell if it starts to fall in order to reduce the potential for that kind of unpleasantness? Not necessarily. Here’s why:

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Common Investing Mistakes

It’s extremely difficult to predict the timing of a market downturn with the accuracy needed to profit from such a prediction. In other words, it is easy to get such a prediction wrong, which can be costly. While we do tilt our portfolios more aggressively or more conservatively based on our market outlook, the data suggests that if you radically reposition out of stocks in an attempt to catch the tip of a market top, you are more likely to miss out on gains than you are to prevent losses, and likely will generate excessive transactions and tax costs along the way.

 

While “buy low, sell high” may sound like time-honored advice, the challenge of getting it right means it rarely is a good way to make decisions in practice. Indeed, if you “sell high” and go to cash waiting for a market downturn to come and go, you may miss out on potential gains as stocks continue to go up, rather than preventing losses. That costly mistake is the reciprocal of another: selling your holdings in a panic during a market selloff, potentially locking in losses as stocks rebound while you remain on the sidelines. The prevalence of these value-destroying behaviors helps to explain why individual investors as a group tend to underperform market benchmarks dramatically.

 

There is a caveat to the generally superior buy-and-hold approach, which is that seeing a paper loss in your portfolio doesn’t feel good. You may prefer to take less risk, which could mean giving up some long-term returns, in order to reduce the period of time you may need to wait out losses, making for smoother sailing. 

Consider Your Goals 

Another factor to consider is how you’re doing relative to your financial goals. That’s where a Financial Advisor can help by talking through goals and priorities and reassessing your portfolio based on where you stand. For instance, if you are saving toward a goal and have made good progress, it may make sense to take on less risk, regardless of the market outlook. This is for two reasons. First, it intuitively makes sense to take less risk when you have more to lose than to gain. Second, for additional peace of mind that your progress won’t be jeopardized, you may desire the lesser uncertainty that can come from a more conservative blend of stocks, bonds and cash. If, like many of us, you have more progress to make and more road to travel towards achieving your goals, riding out the market’s jitters can be the best advice.

 

Bottom line: Working with your Financial Advisor can help you avoid short-term thinking and remember that investing is a long-term proposition. Keeping your eye on the horizon is your best strategy as an investor.

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Check the background of Our Firm and Investment Professionals on FINRA's Broker/Check.

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