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How to Cope With Market Volatility
While the song may say "riding high in April and shot down in May," equities were pretty much riding high April through July—but it was a different story in August.
From the spring through most of the summer, it was onward and upward for the equity markets, boosted by strong corporate profits, rising demand overseas, and continued strong merger and acquisition activity. After a brief setback in June, stocks hit new
heights, with some indices reaching their all-time highs in July. It wasn’t quite the "irrational exuberance" of the mid to late 90s, however, many people got used to the lofty levels. When many of these gains were quickly erased in August, the doom and gloom
spread quickly. The culprits this time were mainly oil and the subprime debt market. With the closing of hedge funds, the bankruptcy of mortgage companies, and the fear that credit failures could expand, subprime took a major toll on investor confidence and, in turn, the equity markets.
If these ups and downs seem familiar, it's because they are. Investors and market pundits sure like market run ups, but they never seem to digest the sometimes corresponding down periods. It’s called volatility, and it always has been and always will be the "pulse of the market."
Coping With Market Volatility
The best way to cope with volatility is to first accept it. The equity markets—both domestic and foreign—are subject to business and government reports, current events, changing investor sentiment, and more, all on a daily basis. By definition, stocks are supposed to be more volatile than most other types of investments. However, they also potentially provide you with the best opportunity to realize your long-term investment goals.
Of course, past performance is no guarantee of future results. However, try to keep the following investment principles in mind through all market environments:
Focus on the Long Term
Since 1950, the best and worst one-year returns widely fluctuate. However, over longer time periods, the volatility flattens out. As you can see here, based on rolling periods, the stock market is positive a majority of the time. In fact, over the past 50 plus years there is no 10-year period that the stock market has not posted positive gains.
The Benefits of Long-Term Investing (1/1/50 - 12/31/06)
Stay Invested
During periods of volatility, it might be tempting to pull your assets to the sidelines until you see a rebound. However, you could sell at a low point in the market, and then reinvest after an uptick—missing the rebound altogether. As you can see in the following chart, just missing a few days of strong market returns can really put a dent in the returns you could achieve. The bottom line: If you wait for the "perfect" time to invest, you could seriously jeopardize long-term performance.
The Penalty for Missing the Market
Having missed a few days of strong returns over a 10-year period (12/31/96-12/31/06) can really hurt your total investment return.
| Period of Investing |
Growth of $10,000 |
Annual Return |
| Fully Invested |
$19,147 |
6.71% |
| Miss the best 10 days |
$11,937 |
1.79% |
| Miss the best 20 days |
$8,224 |
-1.94% |
| Miss the best 30 days |
$5,902 |
-5.14% |
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Don’t Go It Alone
With your financial security and long-term goals on the line, the stakes are too just high to develop an investment strategy on your own. Whatever your financial goals, a financial advisor has the experience and training to give you insight and guidance. He or she can work with you to develop a comprehensive investment plan to help you seek to reach your specific goals based on your:
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Investment objectives |
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Investment time frame |
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Risk tolerance |
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Special tax situations |
A financial advisor will also monitor your results and adjust your plan as your situation changes. For example, your investment goals may change due to any number of life events, including:
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Marriage or divorce |
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College planning |
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Birth |
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Retirement |
A financial advisor can also be instrumental in helping you get through the inevitable periods of market volatility. While short-term volatility may continue, we encourage investors to maintain a longer-term approach to their investment portfolio. As always, we recommend that you work closely with your financial advisor, as he or she can help you remain focused on your ultimate goals.
Where's an Investor to Turn?
While the market environment may remain unsettled over the shorter term, current opportunities may include:
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Large-cap securities—often better positioned to withstand market volatility, companies with attractive growth prospects may now be available at lower prices. |
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Convertible securities—providing the growth potential of stocks by offering equity market participation and the possibility of a lower downside than traditional equities. |
Sound Investing is as Easy as 1-2-3
When it comes to investing for the future, each person has unique goals, risk tolerance, and time horizons. Virtually everyone, however, can stand by three time-tested principles of sound investing—asset allocation, diversification, and rebalancing:
1. Asset Allocation. Allocating your assets across a mix of stocks, bonds, and cash can help you pursue a level of return that is consistent with your risk level.
2. Diversification. Diversifying your assets in a variety of investment styles, including small-cap, mid-cap, and large-cap growth and value stocks, as well as government, corporate, and high-yield bonds—helps ensure that your portfolio’s overall return is not limited to the performance of just one security type.
3. Rebalancing. Because market activity will shift the percentages that you have invested in each asset class and style, proper portfolio rebalancing ensures that you help maintain your desired asset allocation.
Talk with your financial advisor today about how you can benefit from the investment principles of asset allocation, diversification, and rebalancing.
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