With the recent impact of COVID-19 and the wide-spread of the virus it precipitated a sharp drop in the stock market and a historical plunge in bond yields, sending us into a bear market. The question is how long the correction will last and what impact government stimulus will have on economic growth, employment, and corporate earnings.
As an investor it’s important to understand the impact of the choices you make under volatile markets. Volatility is the short-term fluctuation in price or value of a specific investment or financial market. It’s nearly impossible to eliminate, and most individuals understand that some level of volatility comes with the territory when investing for the long term. While these fluctuations can be unnerving, they can also present opportunity. Balancing more aggressive investments with lower-risk options can help create a more stable investment portfolio designed to take advantage of the potential opportunities created by market fluctuations.
Market dips, even the most severe, are generally short-lived. Using the past three decades as an example, the stock market experienced numerous ups and downs along the way. Despite periodic declines, the financial markets have historically tended to rise over the long term.
Keeping volatility in perspective and being prepared for market shifts may help you stay committed to your long-term goals—which could help increase your potential return over time.
Remain committed to your long-term goals.
To quote former President Franklin Roosevelt, “the only thing we have to fear is fear itself”. Volatility (a.k.a. fear index) may indicate trouble but what is important is to understand that volatility in itself is not risk; it is noise. An interim trouble that an investor must be willing and able to withstand and absorb to achieve its potential objective.
Balancing risk and reward.
Investors need to understand that all investments involve some level of risk. Understanding the relationship between risk and reward is an important element in building your investment portfolio. The bottom line is the higher the risk, the higher the potential return. You need to know your objectives, time horizon, and comfort level in order to gauge the appropriate risk for your investment goals.
This chart highlights the different levels of emotion that can be felt during all aspects of the market cycle.
Diversify amongst uncorrelated asset class. During volatile times, while some will lose value, there will be simultaneous gains elsewhere. In the end, you win some. You lose some.
Take a long-term approach and evaluate how this downturn is going to impact your goals.
Use dollar cost averaging, which basically involves investing a fixed amount at a particular date. The frequency can be weekly, monthly, quarterly or annually. The rationale being it brings in discipline as well as help take the emotions and the instincts out of investing in volatile markets. Of course, dollar cost averaging does not guarantee a profit or protect against a loss. The strategy lowers the overall average price per share, thus allowing for the purchase of more shares. You need to be able to continuously invest regardless of the markets ups and down for the strategy to be effective.
Just because portfolio value is readily available, doesn't mean we track it constantly.