Why Riding Out Volatile Markets Serves Your Long-Term Interests
When you hear the phrase “market volatility”, what comes to mind? If you’re like many investors, you probably get a little bit of heartburn thinking about things like price swings, portfolio losses, and general instability in your investments. Even when you’re aware of the inherent volatility of the stock market and cognitively prepared for the cyclical waves of gains and losses, downtimes can cause significant anxiety.
Sometimes, in fact, the markets get more volatile than we anticipated, which played out for many investors in 2020 with the market crash resulting from the COVID-19 pandemic. It’s natural to experience a range of emotions when the markets feel uncertain, including straight-up fear. However, it’s important to stay invested – even when things are extremely volatile. Below, we’ll explore why you should fight your natural inclination to sell and focus on playing the long game.
A Brief History of Market Resilience
Look, we often say that past performance is not indicative of future results, and this is absolutely true when it comes to individual investments. Overall, however, the data shows that the market has trended upward for the past 30 years. This is despite decade after decade of wars, virus outbreaks, recessions, natural disasters, and financial crises. Despite it all, the markets have continued to climb higher.
Did investors suffer losses during Hurricane Katrina or the subprime mortgage crisis? Sure, and you may have personally felt those losses deeply at the time. However, these down times have all been followed by recovery periods – just like we’re experiencing in a post-coronavirus crisis. That’s why investors who rode out all the storms over the past thirty years have seen cumulative growth in their portfolios despite short-term losses.
Cashing Out Usually Means Missing Out
It’s easy to let your emotions get the best of you, especially when you’re trying to preserve your retirement nest egg or ensure your family is financially secure. There are deep emotions tied to our money. However, investors who panic-sell during a down market usually miss out in two ways. First, they are likely selling their investments at a loss, and they’re also likely to miss out on the upside when the markets inevitably rebound. It might feel right in your gut to sell during turbulent times, but such emotional decisions are short-sighted. You risk significant losses over the long-term if you leave the markets at any time, including during times of extreme volatility. For more on why it’s important to combat your emotional responses to financial decisions, check out our article on investor psychology and inherent biases.
Remember: Time is On Your Side – Stay Invested in the Market
The Rolling Stones sang “time is on my side,” and they weren’t wrong! Let’s be clear about what this means, though: trying to time the markets is impossible, and investors who try to exit and reenter the markets strategically usually lose out. Time is truly on your side when you stay the course, remaining in the market and riding out the volatile times. This is due to the relationship between time and volatility.
It’s a fact that investments held for a longer period of time tend to exhibit lower volatility. Conversely, those held for shorter periods often leave you open to more short-term volatility risk. That’s why, the longer you invest, the more capable your portfolio becomes of weathering low market periods. Consider, too, that a commitment to long-term investing can provide tax advantages on capital gains. While short-term gains are taxed as regular income, long-term gains held for 12 months or longer are usually taxed below your income tax rate (depending on your income).
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Final Thoughts on Riding Out Market Volatility
Emotional reactions to a down market can easily derail your long-term financial plans, including your retirement plan. It doesn’t often feel like it in the moment, but you’re actually serving your long-term financial interests when you embrace the volatility of the stock market and hang on for the ride. So, avoid your inclination to jump ship in choppy waters. History has shown that the simple passage of time will always bring calmer seas your way.
Did you exit the market during a down period and you’re unsure how to reinvest? Are you uncertain whether your investment strategy was built with your long-term goals in mind? Contact Davidson Capital Management today to schedule a portfolio review and analysis. We’ll help you ensure your investment strategy is sound, that it serves your long-term interests, and that you are diversifying and rebalancing as needed.