Long Term Investors Should Expect Market Volatility
Market volatility is a part of the investment experience and seasoned investors understand that making data-driven decisions over emotional ones is the key to maneuvering through choppy and volatile markets. Markets go up and markets go down, that is a continuous and never-ending cycle. Investors should not let market movements force them to lose focus or change their game plan just because of near-term conditions.
Investors over their lifetime will experience boom and bust cycles that include market corrections, market crashes and bear markets. How we react to these conditions is the only thing we will be able to control but that reaction means everything to our financial future.
What is Market Volatility
Stock market volatility is a measure of how much the stock market’s overall value fluctuates up and down. Just like overall equity markets, individual stocks can also experience volatility. By understanding how volatility works, you can put yourself in a better position to evaluate stock market conditions then analyze the risk involved versus your growth objectives and risk tolerance.
Volatility matters for those who may need to sell their positions in a short timeframe, such as those who are older and closer to retirement. For long-term investors who tend to hold equities for many years, the day-to-day movements of those equities need to be understood. Volatility is part of the noise that could come while you are allowing your investments to compound returns into the future.
Positioning Yourself According to Your Plan
No matter what equity markets are doing, your plan should align itself with your investing goals, your timeline, and your risk tolerance. Every investor has unique goals they would like to attain. Knowing what your goals are is the first step to creating a path to achieve them. Your goals will determine your time horizon and risk tolerance.
Focus on your personal timeline instead of trying to time the market. During downturns, it may be tempting to pull out of the market, but you may miss out on a healthy recovery. Try to plan for your equity investments to maintain a long-term horizon and ignore the short-term fluctuations. For many long-term investors there is no reason to even subject themselves to daily market headlines. If you have a long-term investment horizon for your equity holdings of at least five years, chances are the current volatility will not last.
Risk tolerance is the level of uncertainty you are willing to accept in order to reap potentially greater rewards. Knowing what your risk tolerance is, or risk awareness, should be part of your financial plan
What to Do When Volatility Spikes
First, make sure you know what not to do: and that is panic. In times of market volatility, investors tend to become unnerved and anxious. This is usually not the best mindset to make rational decisions.
When equity markets experience unsettling fluctuations, ask yourself if your timeline, goals or risk tolerance has changed. If not, stay the course. If so, you need to revisit your approach and plan, preferably with an advisor who can help. Having a good advisor consistently keeping in touch with you and monitoring your situation helps from falling into the typical traps individual investors can find themselves in from making emotional decisions.
Even when equities are performing well, investors still need to be prepared. Market volatility should cause concern, but panic is not a plan. Market downturns do happen and so do recoveries. It is always healthy to confirm that you fully understand your time horizons, goals and risk tolerances. Looking at your entire picture can be a useful exercise in determining your strategy.