Living with Volatility, Again
Volatility is back. Just as many people were starting to think markets only ever move in one direction, the pendulum has swung the other way. Anxiety is a completely natural response to these events. Acting on those emotions, though, can end up doing us more harm than good. Here are seven simple truths to help you live with volatility.
1. Don’t make presumptions. Remember that markets are unpredictable and do not always react the way the experts predict they will.
2. Someone is buying. Quitting the equity market when prices are falling is like running away from a sale. While prices have been discounted to reflect higher risk, that’s another way of saying expected returns are higher. And while the media headlines may proclaim that “investors are dumping stocks,” remember someone is buying them. Those people are often the long-term investors.
3. Market timing is hard. Recoveries can come just as quickly and just as violently as the prior correction. For instance, in March 2009 – when market sentiment was at its worst – the S&P 500 turned and put in seven consecutive months of gains totaling almost 80%. This is not to predict that a similarly vertically shaped recovery is in the cards, but it is a reminder of the dangers for long-term investors of turning paper losses into real ones and paying for the risk without waiting for the recovery.
4. Never forget the power of diversification. When equity markets turn rocky, highly rated government bonds may flourish. This helps limit the damage to balanced fund investors. So diversification helps spreads risk and can lessen the bumps in the road.
5. Markets and economies are different things. The world economy is forever changing, and new forces are replacing old ones. This applies both between and within economies. For instance, falling oil prices can be bad for the energy sector but good for consumers. New economic forces are emerging as global measures of poverty, education, and health improve.
6. Nothing lasts forever. Just as smart investors temper their enthusiasm in booms, they keep a reserve of optimism during busts. And just as loading up on risk when prices are high can leave you exposed to a correction, dumping risk altogether when prices are low means you can miss the turn when it comes. As always in life, moderation is a good policy.
7. Discipline is rewarded. The market volatility is worrisome, no doubt. The feelings being generated are completely understandable and familiar to those who have seen this before. But through discipline, diversification, and understanding how markets work, the ride can be made bearable. At some point, value re-emerges, risk appetites reawaken, and for those who acknowledged their emotions without acting on them, relief replaces anxiety.
The information presented above was prepared by Dimensional Fund Advisors, a non-affiliated third party.
All expressions of opinion are subject to change without notice. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services. Diversification does not eliminate the risk of market loss. There is no guarantee investment strategies will be successful. The S&P 500 Index is not available for direct investment and does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. Dimensional Fund Advisors LP is an investment advisor registered with the US Securities and Exchange Commission.