Market volatility could spook even the most seasoned investor. If a precipitous week or two in the market has you ready to sell, you may want to reconsider your risk tolerance and asset allocation. Attempting to time the market by selling during a drop could often mean missing the prime point of re-entry—selling low and buying high or selling low and failing to buy at all. What should investors consider when navigating market volatility?
A Statistical Case for Riding it Out
An MIT research paper studied investor data through December 31, 2015. It revealed that nearly one-third of investors who panic-sold their stocks after a downturn failed to re-enter the market at all. For those in retirement who no longer want the risk associated with stock investments, that’s one thing. However, those who are still in the asset accumulation phase could risk losing future buying power to inflation if they stay out of the market.
Someone who invested $10,000 in the S&P 500 on January 1, 2002, and remained invested through December 31, 2021, would end up with over $61,000 by the end of 2021. However, the same investor who went to cash during the 10 best market days over that 20-year period would have only $28,260. Often, the worst trading days come within just days of the best ones. This example starkly illustrates the portfolio impact of missing an average of just one day every two years, and it should caution investors against making any knee-jerk selling decisions during turbulent times.
Evaluate Panic-Selling Temptations
If you’re tempted to sell or convert to cash when the market starts to slump, it’s worth doing some introspection as to why.
- Are you invested in assets that tend to be more volatile than broader indexes?
- Are you worried about having enough cash to cover expenses that are coming up soon?
- Are you planning to retire soon and worried about stock exposure?
In some cases, it may make sense to revisit your risk tolerance and work with a financial professional to select assets that are more in line with the amount of risk you’re comfortable with. If you’re getting close to retirement, you may want to set aside some funds in an account that aren’t subject to market swings, so your cash flow is less likely to be impacted if the market has a down year or two. And it’s generally a good idea to avoid investing funds that you’re likely to need over the next few years.
If your assets are invested in accordance with your risk tolerance and desired asset allocation, the answer may be as simple as stepping back and checking your balances only monthly or quarterly. In other words, if you’re happy with your investments and aren’t looking to make changes before volatility hits, it may not be worth tempting yourself by watching your balances drop during a red day.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
Asset allocation does not ensure a profit or protect against a loss.
S&P 500 Index: The Standard & Poor’s (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by WriterAccess.
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