When market volatility takes investors on a wild ride, fear and panic are common responses to this stock market roller coaster. Acknowledging these emotions may be a good first step, but acting upon them could result in impulsive, irrational decisions. Many experts warn investors to never let emotions drive their investing decisions but that’s easier said than done.1 What can you do to stay calm while markets are volatile?
Review and Stick to Your Investing Plan
When you watch your account balances decline from day to day, the decision to do nothing may be the toughest one. But for many, this decision is worth considering if your investment allocations are appropriate for your age, income, and risk tolerance.
Volatile periods may be a good time to review your investing plan to make sure it still makes sense and reflects your needs. For example, if your investments were automatic for the last 20 years, you may find that your strategy has now shifted from building wealth to preserving it. This change may mean you need to move funds from riskier assets to more stable or conservative ones.
When you have a plan that reflects your risk tolerance and are investing according to that plan, you may gain the investing confidence needed to tune out the noise that market volatility may generate.
A 20% drop in investment value over just five months might seem dire. But zooming out to the one-year or two-year rate-of-return chart shows that, even with the recent decline, market values are far higher than they were in early 2020. And looking at a 10-year rate of return puts the recent drop in perspective as just a minor blip.
If you invest for the long term, what happens over a six-month or one-year period might not make much difference in the long run. If you are having trouble maintaining your perspective, consider stepping back and checking your portfolio less frequently when so many forces are challenging the market.
Avoid Market Timing
With great risk might come great reward—and perhaps, great losses. While there is the temptation to maintain your investing wins and avoid losses by going to cash during times of turmoil, this strategy risks missing out on some of the stock market's biggest upside days.
For example, someone who was fully invested in 2002 but periodically went to cash and missed the 10 strongest-performing days over the past 20 years would have less than half the amount as someone who remained fully invested throughout.2 (This example is hypothetical; do not rely on hypothetical examples to determine your specific investment returns.)
Instead of trying market timing, look at market declines as buying opportunities. After all, would you rather purchase a product at its list price or at a 10% discount from last month's price?
You may want to focus on what you can control—your investment contributions and choices—rather than what you cannot control—the direction of the market. Sticking to your investment plan may help you avoid making a wrong, emotional decision during volatile times.
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1 Here’s how to keep emotion out of your investment decisions amid a volatile market, CNBC, https://www.cnbc.com/2022/02/22/how-to-control-your-emotions-during-stock-market-volatility.html
2 Why you may miss the market's best days if you sell amid high volatility, CNBC, https://www.cnbc.com/2022/03/09/you-may-miss-the-markets-best-days-if-you-sell-amid-high-volatility.html
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by WriterAccess.
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