Financial markets often go through phases of relative calm followed by abrupt and often unanticipated spikes in volatility. It is important for investors to understand that volatility is normal and beyond our control. However, we can control how we react. Generally, the best reaction is no reaction at all. Pulling out of the market when it is volatile can lock in losses and could lead to missing out on any subsequent rally.
Here are three good reasons why staying invested for the long term is almost always the best way to navigate market turmoil:
- Market timing is difficult.
Even the most experienced investors do not have a crystal ball or some sort of magic trick that allows them to time the market perfectly. Market timing calls are difficult calls to make with potentially adverse effects on your portfolio. Since no market cycle is the same, it isn’t easy to anticipate market movements.
- Selling during a correction is betting against the odds.
History suggests that periods of sharp declines have often been followed by periods of some of the most favourable returns. The strong historical tendency of markets to rebound provides some evidence that fear-induced dramatic alterations to asset allocation are unnecessary for investors who simply stay the course. Selling during a correction is similar to waiting for house prices to fall and then selling your home and subsequently waiting for a housing bubble before buying a home again.
- Volatility breeds opportunities.
While economic uncertainty will always be a cause for investor anxiety, the resulting market volatility has historically offered active managers in equities and bonds the potential to better position portfolios for the longer term. Markets sometimes get over-exuberant, and prices become excessive, but the opposite is also true. Short-term periods of crisis can push prices artificially low, creating excellent opportunities to buy.
The three points above are all well and good, but when should you rather run?
Simply put, never. However, if you are at or close to retirement and living from your capital, market volatility can be detrimental to your long-term success as you might be forced to sell out of the market when prices are low to draw an income from your portfolio, possibly leading to permanent capital destruction. Therefore, your advisor will probably move some of your funds that you will draw an income from over the short to medium term to a more conservative portfolio with reduced volatility, while the balance of your capital can be left undisturbed in the market over the long term and weather any storms along the way.
Speak to one of our qualified financial advisors today and let us help you successfully weather any storm!