For those of you who closely follow the capital markets, the recent volatility may be causing some investors to worry. In the past couple of weeks, from September 30 - October 10 the US market fell 4.8%. Some investors may find it difficult to remain calm while facing a dramatic market downturn. Weathering the storm through downturns may prove more beneficial to investors than bailing when things get rough.
Although some people get nervous during market declines they’re actually more common than you might think. In the last 40 years, the average intra-year decline was 14% year to year. And although throughout the year the market experienced various drops, overall by the end of the year the market was showing positive returns in 84% of the years compared. Just because there may be a large intra-year decline doesn’t mean that the year will have a negative return.
It’s almost impossible for investors to time the market in order to avoid periods of market downturn. Investors that seem to have success are probably more lucky than skilled in doing so. The pricing of stocks is valued by day to day performance and rapidly changing data, making it increasingly difficult to predict. Determining when the capital markets are positive or trending down is a losers game. The best way to deal with market volatility is to stick to your investment philosophy. If you jump in and out of stocks, you run a greater risk of being “out” when a stock is going up. Patience with your investment strategy by experiencing all the best days in the market, and the bad days, will provide higher returns than if you are only in the market for a couple of the best days.
It is important to take the emotion out of investing. Instead of panicking when the markets have a correction, take a deep breath and let the markets work for you. Market declines are pretty common and not necessarily worth losing sleep over. It’s more profitable to weather the storm and stay the course as the markets usually have positive returns overall.
For more information check out the video by Dimensional below: