Volatility is less frightening if you take a longer-term view
Although past performance is no indicator of future performance, market corrections can be healthy and result in even stronger growth in the future. This is why holding a diversified portfolio for the long term makes good investing sense. It’s time invested in the market, and not the timing of the market, which dictates long-term returns.
Missing out on opportunities
The relentless and continual rise in value over the very long term is typically punctuated by falls. It’s important not to let global uncertainties affect your investment strategy for the years ahead. Individuals who stop investing, particularly during market downturns, can often miss out on opportunities to invest at lower prices. This is one of the biggest costs of market timing, being out when the market unexpectedly surges upward, potentially missing some of the best-performing moments.
Such volatility is less frightening if you take a longer-term view. It’s important to stick to your strategy and keep moving ahead consistently by spreading risk and growing your wealth. It’s volatility in stock markets that make investors nervous. But on the flipside, not all volatility is bad: without volatility, stock prices would never rise.
Avoid being blown off course
In practice, everyone’s investment goals are different. By deciding on your long-term financial priorities – whether it’s funding your children’s education or saving enough to be able to retire early – you can avoid being blown off course by short-term events.
Trying to second-guess the impact of events both national and international – rarely pays off. Instead, investors who focus on long-term horizons (at least five to ten years) have historically fared much better.
Considered and strategic approach
Sensible diversification – owning a mix of assets, including shares, bonds and alternative investment such as property – can help protect investors over the long term. When one area of a portfolio underperforms, another part should provide important protection – and it’s never too early or too late to start taking this considered and strategic approach.
Volatility, risk and market declines are a normal part of the investing cycle, but the media likes drama. Reports will use words that make these market fluctuations sound alarming, so be cautious about reacting to the unnerving 24/7 news cycle.
Reflecting risk tolerances and timelines
If you have a well-diversified portfolio, then it’s more important than ever to stay the course. You have a strategy in place that reflects your risk tolerance and timeline, so stay committed. However, if you reacted and sold in a previous market decline or have not implemented a strategic asset allocation, then now is the time to have a discussion about your investment options.
Be aware of the psychological affect this type of volatility has on you as an investor, and resist the urge to be reactive. The recent decline was expected and is coming after financial markets as a whole have experienced a historic bull phase for close to ten years now. No one knows how severe any market turbulence will be or what the market will do next. It could be over quickly or linger for a while. But no matter what lies ahead, proper diversification and perseverance over the long term are what’s most important.