Market volatility can be difficult for investors to endure. Learn more about what market volatility is and how it could affect your portfolio.
- Market volatility, or how much prices move over time, can be negative or positive.
- Historical volatility does not predict future volatility.
- A long-term investment strategy will generally involve enduring periods of volatility.
Few things make investors worry like the stock market falling 20%. We’ve had clients tell us that they’d rather get in a car crash than see their portfolios drop that much. Considering how much the media has blown it up despite the health (yeah, our economy’s actually pretty healthy right now), it’s not exactly surprising that investors everywhere are worried. Visit our educational resources for the most up-to-date views on the economy and what you can do to improve your financial plan for the future.
Market volatility is not always negative and is almost always necessary for investors requiring higher long-term investment growth. In this article, we’ll answer your questions about what volatility is and how it could impact your financial plans.
Market Volatility Explained
Market volatility is the word used to describe how returns vary over time. Volatility can occur in any market including housing, stocks, bonds, commodities, etc. The volatility that investors oftentimes care most about are stocks.
Stock prices can drop, raise and stay flat at times. Sometimes they fall unpredictably and sometimes they fall gradually over 6-12 months (if not longer). The tough for most investors is, that volatility can happen with a perfectly logical reason sometimes (the economy is shut down and no one is working) and sometimes completely without reason. Even though most people think of their portfolio dropping in value when we’re in volatile markets, volatility can also be a jump overnight of your portfolio of 5-10%. In addition, markets can swing heavily week by week, month by month… however, they typically follow a trend over time. Even the most violent and dramatic events can look like a minor bump in the road over 20 or 30 years. For this reason, we believe that investors who can stay disciplined will benefit over time and those that decide to not drive because of the bumps will have a harder time reaching their destination by foot (aka by saving in their bank account).
This isn’t to say that Progress Wealth blames anyone for disliking volatility. Our personal portfolios dropped in the last 6 months as well and we’d rather ours be up, too. The important thing to remember is, that volatility tells us nothing about the future and trying to time short-term swings in the market historically has only led to people losing money unless they’re lucky. You shouldn’t try to play with the savings your future depends on. You should invest them prudently and responsibly given your goals and risk tolerance.
Our Perspective on the Economy
There are a number of reasons to be less than happy with the economy at this point.
- Rising Rates
- High Gas Prices
… are impacting us all and it hurts.
It’s important when you make decisions to invest (or not) to look past the things we’ve experienced and instead, look at the data.
Today (07/02/2022), corporate profits are at an all-time high.
Household debt as a percentage of disposable income isn’t at the lowest point but it’s definitely close.
Household income isn’t at the absolute highest but it’s close.
Lastly, personal consumption is still rising.
It is undoubtedly true that there are more reasons to be optimistic about the future than afraid.
The most important things we can all do right now as the economy goes through a readjustment period post Covid are:
- Don’t panic. The economy will rebound and if you panic sell, now… you’ll likely seriously regret it within 12-24 months.
- Rebalance your investment accounts if they need it.
- Consider a Roth Conversion. If you don’t know what to consider, you may need the help of a professional. We’re happy to help.
- Ensure you have a sufficiently funded emergency account, an updated resume, and at least one recruiter that specifically recruits in your industry in the event you get laid off.
Investing with Discipline
The hardest two emotions to master in life are patience and faith because we don’t have a reason to believe in them and unfortunately, being a perfectly disciplined investor requires both. Why? Corrections almost are fear-based and can start and stop without a good reason at all. This is why trying to time the emotions of the market is so difficult. It begs the question “what evidence are you going and is it reliable” because there’s no way it could be. If anyone can forecast accurately the emotions of the market over a short-term period, they should lend their technology to therapists everywhere and they’d make a killing. In the meantime, we’ll stick with managing portfolios with the only science worth its salt.
What we’ve found is, so long as you have a prudent investment strategy and are well-diversified, the best move is to stay invested to make sure you capture all of the rebound and long-term gains.
How Progress Wealth Management Can Help
It can be difficult to stay disciplined in a volatile stock market. The fear of loss could lead you to make rash and emotional short-term decisions. Progress Wealth is committed to educating investors and helping them guard against this kind of behavior.
Our experienced financial planners and investment team have a wealth of experience helping clients through bear markets, recessions, corrections, and bull markets. We can help you ensure your investments are aligned perfectly with your goals and in doing so, help you to retire happier, healthier and wealthier. Contact us today to learn more.