It is a volatile time in the stock market.
We’ve seen big gains over the past year due to strong corporate earnings, low levels of unemployment, unprecedented stimulus spending, and optimism that the worst of the pandemic may be behind us.
We’ve also seen big drops in the past few months due to the war in Ukraine, rising oil prices, rising interest rates, continuing supply-chain issues, and the highest levels of inflation in four decades.
So, what should you do with your investments during this period of high volatility, when fear and anxiety are in the air?
If you’ve already done a proper risk tolerance assessment and have an appropriate and broadly diversified asset allocation, the simple answer is that you should probably do nothing.
If you sell when the market is falling, you also have to predict when it will bounce back. Therefore, you must be right twice: First, when to sell before the markets have hit bottom, and second when to jump back in before they recover. That’s almost impossible to do with consistency.
The type of person who panic sells is also likely to wait until the market fully recovers before moving back in. So they end up selling low and buying high.
That’s a sure recipe for low returns.
Instead, do what every seasoned investor instinctively knows: don’t try to time the markets.
If history–and the last two years–show us anything, it is the futility of trying to predict the future. No one has a crystal ball, yet people pay dearly for trying to look into one.
Decades of financial data clearly show that investors who stayed in the markets with a diversified approach through good times and bad have, as a group, benefitted from long-term market gains far more than those who moved in and out in an attempt to avoid downturns.
A Bank of America study illustrates why betting against the market tends to be a losing game: looking at every rolling 10-year period since 1929, the S&P 500 Index had a positive return 94% of the time.
The same study showed that if you stayed consistently invested in the S&P 500 from 1930 to 2020, your total return would be 17,715%. However, if you tried to time the market and accidentally missed the best ten days out of every year, your total return would be 28%.
Furthermore, the market’s best days often occur shortly after the biggest drops, so panic selling is almost certain to lower your long-term returns because you’ll miss out on the markets’ best days.
If you are going to do anything during a downturn, a better course of action is to harvest tax losses and rebalance your portfolio or buy more equities when everything is on sale. If you have extra cash, market downturns can offer good opportunities for putting it to work.
Also, try not to look at your statements too often.
While we can’t lose sight of the pain and suffering in Ukraine and elsewhere, the most successful investors tend to use such difficult periods to optimize their portfolios.
Perhaps the most significant risk for any investor is not market drops but rather allowing their emotions to manage their money decisions and panic selling when things look bleak.
In the immortal words of Douglas Adams in Hitchhiker’s Guide to the Galaxy: “Don’t Panic.” That’s good advice for navigating both the universe and a volatile stock market.
Doug Lynam is a partner at LongView Asset Management in Santa Fe and a former monk. He is the author of From Monk to Money Manager: A Former Monk’s Financial Guide to Becoming A Little Bit Wealthy — And Why That’s Okay. Contact him at firstname.lastname@example.org. Photo by Timur Weber.