It's impossible to predict when the market will drop or how far it will fall. With this in mind, investors should take steps to position their portfolios against potential risk during times of growth.
Fact: Future volatility could be one of the biggest threats to your portfolio. Logically, we all know that market growth is not permanent — and history shows us that what goes up will come down. We also know that a well-balanced portfolio can often be our best defense against future market drops. But when markets are soaring, it can be challenging to sacrifice near-term gains for better overall long-term results.
The decade-long bull market of the 2010s eased the pain that many investors felt following the 2008-09 financial crisis. Reality came crashing back in early 2020, as COVID-19 spread globally and markets plummeted in response.
The downturn left investors stunned and searching for reassurance that everything would eventually be OK. Fortunately, that reassurance is easy to find: A quick glance at the history of the U.S. stock market provides us with three reminders about the true nature of investing.
1. Volatility is not new. Between 1980 and 2018, we experienced 13 market corrections (a market pullback of 10% to 20%).2 That’s an average of one correction every 2.9 years.
However, in that same period, the S&P 500 index posted an average return of 12.65%.3 That average includes the years we experienced corrections related to significant global and domestic events.
The takeaway here is that market highs have been followed by market drops — and they will do so again. And while some recoveries take longer than others, history shows us that markets generally recover from a correction in four months on average.4
2. Markets have weathered numerous crises in the past. The coronavirus pandemic is unprecedented in its global reach and effect on both human life and economies. However, markets — like people — are resilient and often come back from adverse events with renewed optimism.
3. Timing the market doesn't work. Time in the market does. The adage of “buy low, sell high” often leads investors to think they can “time” the market. But if you’ve been investing for any amount of time, you know it’s nearly impossible to anticipate precisely when markets are at their highest high or lowest low.
You might be able to buy or sell at the exact right time once, but the odds of replicating such success are incredibly low. Investors who try to anticipate market highs and think they can “get out” before the market drops could be setting themselves up for potential disaster.
☑️Rebalance. Check in with your financial professional to make sure your portfolio is diversified and balanced to fit your goals and risk tolerance. Maybe it's time to take some gains off the table or reallocate some sectors with greater earnings.
☑️Refocus. When markets are soaring it's all too easy to make long-term decisions based upon short-term gains. Now is the time to focus on your goals!
☑️ Reaffirm. Take stock of your goals. Many people have experience a major shift in goals over the past year. Does your financial plan still reflect your long-term goals? If not it's time to refresh your plan to reflect your current goal time-line.
Don't get caught up riding the [market] wave and leave yourself unprepared for the possibility of volatility. Talk to your trusted advisor to help you navigate potential uncertainty in the stock markets - and to help make sure you're still on track toward your goals.
Sources:
1 Yun Li. CNBC. March 23, 2020. “This was the fastest 30% sell-off ever, exceeding the pace of declines during the Great Depression.” https://www.cnbc.
com/2020/03/23/this-was-the-fastest-30percent-stockmarket-decline-ever.html. Accessed March 23, 2021.
2 Thomas Franck. CNBC. Feb. 27, 2020. “Here’s how long stock market corrections last and how bad they can get.” https://www.cnbc.com/2020/02/27/heres-howlong-stock-market-corrections-last-and-how-bad-theycan-get.html. Accessed March 29, 2021.
3 Thomas Kenny. The Balance. Nov. 18, 2020. “Aggregate Bond Index Returns vs. Stocks ’80-’18.” https://www.thebalance.com/stocks-and-bonds-calendar-yearperformance-417028. Accessed March 29, 2021.
4 Thomas Franck. CNBC. Feb. 27, 2020. “Here’s how long stock market corrections last and how bad they can get.” https://www.cnbc.com/2020/02/27/hereshow-long-stock-market-corrections-last-and-how-badthey-can-get.html. Accessed March 29, 2021.