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Getting Comfortable with Volatility

Getting Comfortable with Volatility

March 18, 2019

If you pay any attention to the stock market, you probably know that ups and downs are commonplace. Though this can be nerve-wracking for investors, fluctuations are actually a normal part of investing. The last several years, however, have been unusual in that the stock market has seemed impervious to some unexpected events that would normally induce volatility. Here are the most common examples of what can lead to a shakeup in the markets…

  • Economic indicators (leading, lagging, interest rates, inflation prospects, etc.)
  • Political developments
  • International crises
  • Natural disasters
  • A slip in a company’s public relations

There is a debate among investment experts on the reasons for the volatility of the stock market. Some say traditional forces, like those listed above, are at work in creating the huge shifts. Others claim that the new forces at play (such as online/automated stock trading, increased access to instant news reporting, and the large-scale instability of the world economy) are impacting volatility.

While it may be difficult to remain calm during a substantial market decline, it is important to remember that volatility is a normal part of investing. Additionally, for long-term investors, instantly reacting to a decline may be more detrimental to portfolio performance than the drawdown itself. This is because it robs them of the opportunity to make a return when the market, inevitably, swings back up.

For example, between 1979 and 2018, the average intra-year decline was about 14 percent. Despite these substantial intra-year drops, calendar year returns were positive in 33 years out of the 39 examined. This goes to show just how common market declines are and how difficult it is to say whether a large intra-year decline will result in negative returns over the entire year.

So, the markets are down, and even though you logically know better, you’re still worrying. Here are some things to do instead of panicking…

  • Remember that volatility is normal.
  • Keep in mind what causes it.
  • Diversify your risk.
  • Stick with your investment objectives.
  • Respond to facts instead of reacting to emotions.
  • Call a financial advisor if you need additional perspective in difficult times.

Overall, you must remember that all investing carries some risk. It’s also important to note that past performance is no guarantee of future results. Anytime the stock market is volatile, it’s really just returned to the norm. Get comfortable with the ups and downs, and reach out to your financial advisor if you need any help figuring out your next move during a big market decline.