How should you deal with the current volatility in the market
How should you deal with volatility in the market?
Volatile stocks, rising bond yields and general unease about the Fed’s next move is adversely affecting investor sentiment and consumer confidence.
The markets pulled back sharply on Thursday which caused some concern among investors. Even so, the S&P 500 Index is still up over 15% year-to-date. What’s worrisome is that the markets have had a substantial run during the past 2 years with no significant correction. There are also some underlying weaknesses that are appearing in the background.
Every time the market pulls back a few percentage points, people are wondering if this is the one that will turn into a something bigger. So far, the minor pullbacks have been nothing more than normal profit-taking. People have been burned in the past couple years expecting a major correction.
Whether this turns into something bigger or not, investors should be prepared for but not react to the volatile conditions. On average the markets temporarily correct roughly 14% per year and 30% every 5 years. Understanding this is important because temporary pullbacks are normal and part of the process (even the major one in 2007-2009).
More importantly investors should also understand that the only way to participate in every up move in the market is to simultaneously be willing to participate in every down move. If the market appreciates at an average rate of return of 10% per year is patiently sitting through some passing downtimes such a bad proposition?
Reacting to or selling in advance of a potential pullback is usually more risky than just sitting through normal processes of the markets. The best investment portfolios are designed to be long-term in nature, well diversified and planned in advance to tolerate any normal and eventual market correction.
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