Volatility can be a hard pill to swallow for any kind of investor. While our tolerances for risk may vary, we all feel the ups and downs to some extent. Therefore, it is of the utmost importance to stay disciplined and avoid falling victim to the rollercoaster of emotions that volatility may put you through.
But what does “disciplined” truly mean during volatile periods in the market? It means that you, as an investor, avoid emotional decisions based on short-term sways in the market. Remember, trying to “time the market” is an extremely difficult thing to do because you must be correct twice: first to sell out of your holdings and then to get back into the market at a beneficial time. Accurately timing this once can be quite difficult, but precisely predicting market fluctuations twice is exceedingly unlikely. For this reason, historically speaking, it is better to hold steady with your plan.
Let us look at March 2020 when the COVID-19 Virus sent a shockwave through the world as an example. During the lowest point of the market downturn in March, the S&P 500 saw a drop of 34%. Flash forward to the end of the year, only 9 months later, and the S&P 500 rose 68%. (1)Now imagine the investor who gave into their emotions and sold out of their equities at that bottom in mid-March. Not only did they turn any unrealized (paper losses) into realized ones, but they also missed out on all the bounce-back growth and compounding!
Having a long-term financial plan can help you stay disciplined. When you have written goals and objectives specific to your situation, it becomes easier to have an anchor during turbulent times in the market. Finally, working with a financial planner provides you with a trustworthy guide that helps to keep you steady and informed during times of uncertainty. Please reach out to one of your advisors if you would like to discuss your plan or set up a time to meet.
Sources:
1. https://www.washingtonpost.com/business/2020/12/31/stock-market-record-2020/