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? Sell everything in case the war in Ukraine goes nuclear? Join a Doomsday Prepper chat group and hoard survival supplies? Or maybe stash gold bars under your mattress in case we enter a new Depression?
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 — shows 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.
Those who stay in the markets with a diversified approach both sleep at night and benefit from long-term market gains. Over every 10-year period since 1929, the S&P 500 Index had a positive return 94 percent of the time, according to a Bank of America study.
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 percent. However, if you tried to time the market and accidentally missed the best 10 days out of every year, your total return would be 28 percent.
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. And if we see a full-scale nuclear calamity in Ukraine, Powerbars will hold more value than gold bars, and all bets are off.
If you are going to do anything during a downturn, a better course of action is to invest more and buy when everything is on sale. While we must never minimize the pain and suffering of the world, especially with a brutal war raging in Ukraine, the most successful investors see these difficult periods as buying opportunities.
If you don’t have extra cash to invest, now is a great time to rebalance your accounts to make sure they align with your target allocations, do tax-loss harvesting where appropriate, and try not to look at your statements too often.
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.
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