What Shall Investors Do When Markets Are Turbulent?
In moments of market turbulence like the one we have been facing in the few last months, investors might experience panic, anxiety and/or fear, which could lead them to make impulsive investment decisions.
Recovering from downturns
In situations like this, it is important to remember that the stock market has experienced similar situations in the past and it has a long history of successfully recovering from hits like the one it’s experienced in 2022.
Investors who sell out in bear markets instead of preserving their money end up making their losses a permanent situation. So, if possible, try to maintain your investments and wait for the market to recover.
Stock market fluctuations are outside the control of any single investor. So, only look at what you can control and avoid impulse decisions when economic conditions change and markets become volatile. Try to focus on key investing concepts such as being well diversified and rebalancing your portfolio to stay aligned with your investment goals.
A dollar-cost averaging strategy can also help you stay focused on your future and reduce or remove emotions from decision-making while continuing to invest, even in times of market turbulence and rising inflation.
Market timing
Some investors decide to sell their assets and try to buy them back at a cheaper price. It is extremely difficult to time the market successfully compared to staying fully invested over the same period of time.
Several studies show that the cost of waiting for the perfect moment to invest typically exceeds the benefit of the correct timing. And because perfectly timing the market is nearly impossible, the best strategy for most people is not to try to market-time at all.
Investors may pay a high price for being uninvested. Missing the best days of the market will strongly impact the total return of your investments in the long run.
The following chart shows the annualized returns of the S&P500, in different scenarios:
Another study shows that over the last 20 years, the annualized return for the S&P500 was 8,8%. If you remove the best 10 days of the market from the calculation, then the annual return drops to 4,6%. That is a reduction of 48% for not being invested in the best 10 days over period of 20 years. Furthermore, if you don’t consider the best 30 days, then annualized return for the S&P500 would be -0,2%.
Focus on the long term
So the best strategy for long-term investor is to stay calm and invested and avoid trying speculating to get more profit on short-term moves of the market.
Article Source: Investors Trust, October 2022