Market volatility: Don’t just do something; stand there
We often talk about market volatility in the midst of surprise drops, but it’s useful to consider during calmer moments what behavior could be best for your accounts.
When markets are in turmoil and account balances start to fall, many people feel a strong temptation to do something to “stop the bleeding” and cut their losses. But it’s often the case that staying the course proves to be the better path in the long run — and sometimes in the short-terms also.
As we look back at the extreme market volatility that began at this time last year (Q4 2018), let’s consider how a few different investing scenarios would have played out. According to an analysis done by Vanguard, a hypothetical 60/40 stock/bond portfolio worth $1 million on November 1, 2018 would have lost 5.7% of its value by Christmas Eve. Yet selling the portfolio at that time and getting out of the market, even briefly, would have cost an investor tens of thousands of dollars in two months, compared to the alternative of staying fully invested.
When faced with a similar situation, think about how you might feel if markets rebounded and you could have earned back all your money and more. That’s why it’s best to stick to the long-term plan you’ve put together with your financial advisor. In other words, when markets are jittery it’s often best to remain calm and let the craziness pass you by.
U.S. stocks represented by CRSP US Total Market Index. US bonds represented by Bloomberg Barclays US Aggregate Float Adjusted Index. Global stocks represented by FTSE Global All Cap ex US Index. Global bonds represented by Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index.
The performance of an index is not an exact representation of any particular investment, as you cannot directly invest in an index.
All investing involves risk. Past performance is no guarantee of future results.