Market volatility often triggers a knee-jerk reaction among investors, tempting them to liquidate all assets and convert them into cash. However, historical data underscores the importance of remaining invested over a more extended period, as intra-year stock declines average around 16% but result in positive calendar-year returns roughly 80% of the time, reflecting their inherent resilience.
Panic selling, therefore, might not be the smartest move. Instead, comprehending the benefits of a disciplined investment approach can potentially yield higher long-term returns. Market volatility, characterized by fluctuating stock prices, may be intimidating but is a routine occurrence, much like waves in the sea. Every major downturn in the U.S market history has eventually seen recovery, rewarding those who held onto their investments.
Pulling out investments during a market downturn can cement losses and rule out potential benefits from market recovery. Retail investors tend to inadvertently go against the principles of buying low and selling high – offloading investments after steep declines and missing prime market rallies.
Successfully timing the market is a challenging endeavor, as it involves making accurate decisions twice - while selling and while buying. Bear markets in the U.S since 1929 have averaged around 11 months, and they typically last less than a year even though they may seem to last forever.
Diversification across various asset classes, sectors, and geographical areas can cushion against poor performance in any one stock or asset type. Instruments like bonds and alternate assets, which behave distinctively from equities, can bring stability to a portfolio when stocks take a tumble.
Investors can turn to strategies like dollar-cost averaging, which involves investing a fixed sum at regular intervals. This strategy staves off the need to time the market while ensuring investments are made during lower-priced periods.
Young investors can afford to stay invested in equities due to their longer investment horizons, allowing them to weather short-term market fluctuations. However, retiring during a bear market can pose significant risk due to sequence-of-returns dilemmas. A practical measure is to build a cash buffer equivalent to one to two years of expenses and adopt more conservative allocations if retirement is five years away.
Separately, establishing an emergency fund can provide a safety net for unforeseen financial challenges without the need to sell off investments. Panic selling often aggravates losses and hampers financial objectives. While market volatility can be distressing, it is a typical characteristic of markets. An investment strategy rooted in discipline and resistance to panic selling can yield better results.