To begin, our hearts break for those in Ukraine and we pray for a speedy end to the senseless fighting.
So now that Russia has officially invaded Ukraine, what does that mean for stock market investors in the US? Unfortunately, it most likely means more volatility. Volatility means downs and ups, as we recently saw with a 950-point positive swing in one day. There can be good days and weeks and poor days and weeks - but one day when most people don’t expect it, the low will be in the rearview mirror.
Market volatility is a normal part of investing, and something we talk to each client about at the beginning of our relationship. We do not know what the market will do tomorrow or next week, but we’ve learned that over time, the best way for savings to stay ahead of inflation is to be invested in the stock market.
If market volatility is keeping you up at night, here are some things to keep in mind:
Turning off the news may be the best medicine
Every day there are media reports with “the sky is falling” headlines. You can also find articles on the internet and commentators on TV providing you a reason to be optimistic. As they say in the media: “if it bleeds, it leads.” The media is not in the business of education but of selling your attention. Negative, attention-getting headlines capture more interest than anything positive.
Investors in “Accumulation Mode”
For investors who are in the “accumulation mode,” those not yet retired and still contributing to their investment portfolio, market downturns are often a gift. Everything investors were happy about owning yesterday or last month is now on sale. Imagine turning the clock back to the bottom of the market in March 2009 (DJIA 6,547), or March 2020 (DJIA 19,174). Knowing what we know now, we would have loaded up at the lows. Everyone who kept putting money into their 401k accounts were buying at those low levels. Those who froze and stopped investing, or worse, sold out, missed on a great opportunity. Conclusion: nothing to worry about for this group.
Investors in “Decumulation Mode”
For those who are now living off their investments, this is a much different situation but not a bad one as long as a foundation has been established through previous proper planning. This means making sure there is enough of a buffer with cash and fixed income investments to weather the storm. When retirees have a large portion of their holdings in bonds, they can pull funds from bonds when equities drop. This will give the equities time to recover without the need to sell low. Conclusion: with proper planning, this group should have nothing to worry about when markets trade down. For those who did not plan, better now than never and we’d be happy to help.
Resist the Urge to “Do Something”
Successful people didn’t become successful by doing nothing. Many people are wired to “do something” when faced with a problem. Unfortunately, this admirable quality in life can have the opposite effect when investing. When fear or greed takes eyes off the long-term plan, and action is taken, it too often ends up badly. Investors who decide they can no longer sit and watch their portfolio drop, and sell out of the market, are soon faced with the “when to reinvest?” question. The perfect answer is to re-enter at the market bottom but that rarely happens. In the end, this group makes out much worse than if they did nothing. We still hear about investors who sold in 2008 and are still trying to make up ground. Unless your “do something” is to add more (buy low) dollars into the market, it’s best to resist.
As the legendary investor and author Peter Lynch once commented: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves”.
The act of actively rebalancing a portfolio means that when an asset class drops, dollars should be shifted from higher performing assets to those that have lagged. This is much easier said than done and why discipline is so important.
The beauty about active rebalancing is that with market volatility, returns can be enhanced over a portfolio that didn’t go through periods of volatility.
There is no doubt that we’re seeing some scary headlines right now and there is a good chance that we will see further economic and/or market downturns.
We don’t know what the future holds, but with history as our guide, it’s a pretty safe bet that we’ll look back at the market levels of today and wish we had invested more, regardless of where the market goes in the months to come. One day out of nowhere, we will hit the bottom of the market lows. It could be today, next month or next year. The important thing is that your investment dollars are there when it happens.