Volatility Not a Reason to Abandon Sound Long-term Strategies
October has been a rough month for investors so far. Like it or not, it’s during the most trying times when advisors really earn their keep as investors turn to trusted experts for counsel and direction. This is where it can get tricky for investors. Creeping into their mind is the question of whether their investment strategy is still best for them. As fiduciary advisors, it is our job to educate our clients before they act upon emotions, which sometimes leads to irrational decision making.
Here are some important reminders that can help investors stay on track when it comes to investing.
Market Corrections are a Part of Investing
A market correction is often defined as a 10% pullback from a recent peak. After a calm 2017, two corrections have occurred so far this year. Experts have offered many reasons for the volatility, including the trade dispute with China, rising interest rates, mid-term-elections, peaking earnings, and valuations. The roller-coaster ride in stock market prices serves as a reminder that markets change, sometimes violently, and that a well-designed, long-term approach to investing is key in today’s environment.
Corrections Don’t Often Turn into Bear Markets
Data from the Schwab Center for Financial Research showed that there have been 22 market corrections since 1974. Corrections historically tended to be short-lived, and only four of them, occurring in 1980, 1987, 2000 and 2007, eventually ended up as bear markets.
Corrections look Less Scary with a Long-term View
Although volatile markets can be difficult to endure, a look back at history shows that investors are less likely to suffer losses over long periods. The chart below shows that markets have rewarded investors over time. Every year has rough patches. While the timing of pull-backs can’t be predicted, they can be expected. According to JP Morgan, markets suffered double-digit declines in 21 of the last 38 years. But despite the many sell-offs, roughly 75% of those years ended with positive returns
Bonds play a role in Portfolios
We believe most investors should maintain a mix of stocks and bonds in their portfolios, especially during times like this. When stocks decline, bonds have typically helped offset risk and preserve capital. That’s a reason to invest in bonds, even in the face of rising rates.
We understand the uncertainty and fear that volatile markets and negative headlines create with investors. However, we strongly advise against shifting investment strategy in reaction to short-term fear. Being prepared for downturns and knowing how to stay disciplined and not overreact is key for avoiding emotional investing. We can help. It is perhaps the biggest source of value we offer clients.