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Volatility and Investing Principles

Chase Perry
June 14, 2022

It’s official; we’ve hit a bear market in 2 of the 3 major U.S. stock indices eclipsing -20% from the previous highs (S&P 500 & Nasdaq). If you watch or read the news, you have undoubtedly seen the frightening headlines. The constant barrage of new headline news is very effective at creating anxiety and many people struggle to separate their emotions from investing. It’s important to remember that markets go up and down and reacting to current market conditions can lead to poor investment decisions. When headlines unsettle you, remember to focus on what you can control and maintain a long-term perspective.

Downturns are Normal
On average since 1926, stocks have dipped into bear market territory every 6 years with losses averaging almost 40%. While market downturns may be unsettling, the financial markets have rewarded long-term investors. Historically, the equity markets have recovered and hit new highs following every major market downturn.

Think back to March 2020, the S&P 500 Index declined 34% from its previous high as the pandemic worsened. Even if investors were able to successfully time getting out of the market, they were probably unable to correctly time getting back in. As more information became available, the S&P 500 Index jumped 18% from its March 23rd low in just three trading sessions. Investors who fled to cash would have missed the rebound!

Don’t Try to Outguess the Market
It can be tempting to try and avoid a market downturn by selling out of stocks, but it’s hard to time it right. If you sell and are still on the sidelines during a recovery, it can be difficult to catch up. Missing even a few of the best days in the market can significantly undermine your performance. As shown below, missing out on the best days can be costly:

History is On Your Side
Some of the best times to buy stocks have been when things have seemed the worst. Sudden market downturns are unsettling, but historically, US Stock returns following sharp declines have, on average, been positive. Since 1926, US stocks have tended to deliver positive returns over one-year, three-year, and five-year periods following steep declines, making the case for investors to stay the course. Handsome rebounds, such as these, can help put investors in a position to capture the long-term benefits the market offers.

Conclusion
Times of uncertainty and volatility also brings opportunity. We are actively evaluating our portfolios for rebalancing and tax-loss harvesting opportunities. Rebalancing during periods of market volatility helps ensure your asset allocation remains on target. And tax-loss harvesting allows us to lower your tax bill by selling losses to cover realized or future gains. We know these are uncertain times and believe that a balanced and well-diversified portfolio, coupled with a disciplined investment strategy will produce success in the long run. If the recent market volatility has you feeling anxious, please reach out to your advisor – it’s often the case that the current environment has less impact than you might think!

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