Over the past few weeks, markets have been experiencing more volatility than what so many have come to expect as the norm and what has characterized the markets over the past several years. It is ironic because when it comes to investing, it is market volatility that is actually the norm – what we have experienced over the last several years is what is unusual.
Regardless of when or how frequently volatile markets present themselves, they can test investor resolve. If you are entertaining seemingly logical excuses to bail out in response to this volatility or in anticipation of a steep or sustained market downturn, we encourage you not to panic and to redirect your energy. Remember what we have come to learn about investing from decades and decades of practical and academic research: capital markets long-term trajectories have been upward. If you sell when markets are down, you are far more likely to lock in permanent losses than to come out ahead.
So, what should you be doing?
First, manage your exposure to late-breaking news. There’s a difference between following current events versus fixating on them. In today’s multi-tasking, multi-media world, it’s easier than ever to be inundated by the late-breaking news. When you become mired in the minutiae, it is hard to retain your long-term perspective which is the vantage point you simply must have to be a successful investor.
Second, revisit your carefully crafted investment plan. You thoughtfully constructed your investment portfolio – you chose to allocate your dollars to various sources of expected returns, you chose to diversify globally to dampen the risks involved and you chose to implement your portfolio with low-cost funds that are managed in an evidence-based manner. As financial author Larry Swedroe reminds us: “The key to successful investing is to get the plan right and then stick to it. This means acting just like the lowly postage stamp that does one thing but does it well. It sticks to its letter until it reaches its destination. The investors’ job is to stick to their well thought out investment plan until they reach their destination.” Don’t give in to your gut instincts – you promised yourself you wouldn’t do that.
Third, don’t necessarily act on it, but use this time to reconsider your risk tolerance. When you choose to invest, you commit to accepting a measure of market risk in exchange for those expected market returns. During quiet or “good” times, it’s easy to overestimate how much risk you can stomach. If you discover you are miserable to the point of breaking during even modest, short-term market declines, you may need to rethink your investment plans; we can start to plan for prudent portfolio adjustments that can be implemented judiciously over time. If, on the other hand, you discover that you can handle the risk, use market downturns as opportunities to invest more; you will be especially well-positioned to make the most of any recovery.
Fourth, know that, as your financial planners, advisors, and advocates, we are here for you. No, we don’t know when. We don’t know how severe it will be or how long it will last. But sooner or later, we expect the markets will tank again for a while, just as we also expect they’ll eventually recover and continue upward. Accepting and embracing market volatility is part of that program.