When financial markets hit periods of volatility, investors will have many questions in mind. Is this the right time to sell? Why are my investment account balances dropping? Shouldn’t I be doing something?
We understand the need to stick to the financial plan regardless of market moves, but sometimes investors remain nervous about all the market noise in the news.
The stock market downturn at the end of 2018 provided an instructive case study on what can happen if investors make changes just when the market situation starts to look dire.
The illustration below shows that a hypothetical, diversified 60% stock/40% bond portfolio that started with $1 million on November 1, 2018, would have lost 5.7% of its value by Christmas Eve. Yet that same portfolio would have jumped to a 4.2% gain just two months later.
As a result, an investor who sold the portfolio’s assets at the Christmas Eve bottom would have nearly $100,000 less than one who stayed the course.
Staying the course can pay off; abandoning course can be costly
The global stock market drop in late 2018 offered a lesson in investor behavior
Sources: Vanguard calculations, based on data from FactSet, as of February 28, 2019. U.S. stocks represented by CRSP US Total Market Index. U.S. bonds represented by Bloomberg Barclays U.S. Aggregate Float Adjusted Index. Global stocks represented by FTSE Global All Cap ex US Index. Global bonds represented by Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index. The performance of an index is not an exact representation of any particular investment, as you cannot directly invest in an index.
3 tips to ride through market volatility
When market volatility happens, it’s always important to remember the value of:
- Having realistic expectations. Vanguard Investment Strategy Group anticipates higher financial market risks and lower financial market returns over the near- and medium-term.
- Staying diversified. A great way to insulate a portfolio is to have exposure to stocks, bonds, and international markets. Bonds can act as ballast during downturns. International exposure provides access to markets that may be generating positive performances when others are falling.
- Tuning out the noise. There’s an adage of never checking accounts when stocks are tanking. It’s smart advice. As the graphic above shows, making a decision based on a recent market event often results in a mistake.
Markets become volatile. That’s a given. When they do, this analysis may help investors consider the potential downside of emotionally reacting to market noise by selling investments or trying to time the markets.
Originally Posted on September 9, 2019 – How To Beat The Jitters When The Markets Shake
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