Approach Volatility by Taking a Step Back

Investment Strategy

Approach Volatility by Taking a Step Back

When markets react, consider a broader historical perspective before changing your financial course.

October 26, 2018

Periods of market volatility – especially pullbacks – can trigger emotional responses in investors. It happens. And it’s normal. Volatility can also appear as rapid upswings causing sometimes-unbridled euphoria that can also impact judgment. That’s why the best response to market volatility is to contact your advisor for a heartfelt conversation about what the numbers really mean.

Pullbacks Throughout History

Pullbacks can make investors want to pull up stakes and pull out – a common reaction and a common mistake, especially for long-term investors. The right knowledge can help us avoid this mistake, and when we are willing to learn, there’s no better teacher than history.

By looking at the market over a long period of time, we’re provided with a true testament of resiliency. Each decline along the way felt terrible. And declines today feel just as bad. But when we track the overall growth the market has achieved, we learn a lesson in persistence, patience and commitment.

Remember:

  • The stock market is cyclical.
  • You will likely encounter numerous pullbacks and/or corrections as a long-term investor.
  • A study of the stock market shows its resilience.
  • The upturns have always been stronger than the downturns in the long run.

Source: Morningstar; Past performance may not be indicative of future results. There is no assurance these trends will continue. The market value of securities fluctuates and you may incur a profit or a loss. This analysis does not include transaction costs which would reduce an investor’s return. The S&P 500 is an unmanaged index of 500 widely held stocks. An investment cannot be made directly in this index.


Over Time, Returns Have Been Positive

For every action, there’s a reaction. While Newton applied this law in the physical world, it also holds true in the realm of human emotion. When we perceive that things aren’t going our way, we react. And when coping with seemingly unpredictable returns, knowledge and time can once again be our allies. As shown in the chart below, returns over short periods of time have been typically unpredictable. But things tend to become less volatile when you expand the time horizon to five years or more using rolling returns.

Rolling returns show the behavior of returns for holding periods like those experienced by long-term investors. In the chart below, we see positive returns over every 20-year period in the S&P 500. Remembering your long-term time horizon can help when facing short-term disappointments.

Remember:

  • Returns have been less volatile over longer holding periods.
  • Returns over time have been positive.
  • Dollar-cost averaging can help take advantage of volatility.

As of 12/31/2017. Source: Morningstar and PGIM Investments, S&P 500 TR USD Index. This example is for illustrative purposes only and is not indicative of the performance of any investment. It does not reflect the impact of taxes, management fees, or sales charges. The S&P is a weighted, unmanaged index composed of 500 stocks believed to be a broad indicator of stock price movements. Investors cannot buy or invest directly in market indexes or averages. Past performance is no guarantee of future results.


Especially during declines, your advisor can act as a sounding board for your concerns. By talking about current events in light of your overall financial plan, your advisor can help provide reassuring perspective to help you stay the course, even when the market seems relatively tumultuous.

 

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