Market Turbulence: A Historical Perspective
In early 2020, the coronavirus outbreak caused a sharp market downturn, which was unexpectedly followed by a swift recovery by summer. In 2022, global equity markets entered bear territory, only to rally again in 2023.
Investor Concerns About Volatility
It’s no surprise that many investors are concerned about volatility. Historically, market volatility is a normal occurrence. Periods of high volatility can last for several quarters or even years. Market swings may seem surprising if we’ve experienced a prolonged period of stability or an extended bull or bear market. Even during bull or bear markets, there can be significant fluctuations.
Reducing the Impact
The volatility in your portfolio is generally less severe than the overall market volatility. Your portfolio’s asset allocation helps dampen this volatility, with fixed-income components acting as a stabilizer, smoothing out returns. Diversification within each asset class also reduces volatility and minimizes risk.
To further reduce portfolio volatility, an investor can increase their fixed-income allocation and reduce equities. They can also focus on historically less volatile equities, such as large-cap, dividend-paying companies.
Benefits of Volatility
Volatility can also present opportunities, as downswings offer buying opportunities. The money managers overseeing your investments can acquire additional shares at discounted prices or invest in quality companies previously deemed too expensive. Additionally, purchasing shares or fund units at lower prices can yield gains when the market recovers.
Psychological Preparedness
Preparing for volatility also involves psychological readiness. Understand that market declines are part of the cycle. Even though future trends are unpredictable, it’s reassuring to know that every market correction or bear market has been followed by a recovery.
If volatility concerns you, consider the yo-yo analogy: imagine riding an escalator while playing with a yo-yo. The yo-yo represents the stock market’s ups and downs, but the overall trend is upward.
Tuning Out Media Noise
Tuning out media noise is also crucial. Media coverage often dramatizes market fluctuations, creating unnecessary anxiety. Recognize that such volatility is normal and expected.
Seeking Support
Even with the understanding that volatility is normal, extreme market swings can feel unsettling. During a prolonged bear market, you might worry that markets won’t rebound and your portfolio won’t recover, but the real danger lies in stopping investments and missing the recovery. Conversely, during a long bull run, you might believe that the old market cycles no longer apply, leading to overinvesting in equities and exceeding your risk tolerance.
Call to Action
Imagine your portfolio staying strong through volatile markets. Start planning for market volatility today and safeguard your financial future.
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