Why It’s Normal to Have Market Volatility
If you regularly monitor your investment portfolio, you’ve likely noticed that your assets fluctuate in value—sometimes rising, other times dipping. This is a natural part of investing, as the stock market is in constant motion. Daily changes in market indexes, such as the S&P 500, are typical, with minor fluctuations often going unnoticed. However, when the market experiences sharp spikes or drops, it’s referred to as "volatility."
While heightened volatility can be unsettling, it’s a normal aspect of long-term investing. Here’s why maintaining your course during these volatile times can reap the most benefits.
Timing the Market vs. Time in the Market
The timeless mantra, “buy low, sell high” may seem simple. However, predicting the market’s highs and lows are far more challenging in practice. The most critical factor in successful investing is time. Attempting to buy at the lowest point and sell at the highest can lead to missed opportunities and even potential losses. Even the most experienced market analysts can’t predict every market fluctuation.
By contrast, a long-term investment strategy—keeping your funds in the market over time—has historically demonstrated better results. For instance, the S&P 500 saw a remarkable 24.4% growth in 2023. Missing out on just the 10 best days of that year could have reduced potential gains to only 18.3%. To put this in perspective, if you invested $10,000 on January 1, 2023, missing those top 10 days would have significantly impacted your returns.
The Market Trends Upward Long-Term
It’s easy to get caught up in the daily ups and downs of the market, but it's crucial to remember the bigger picture. Over time, markets generally trend upwards. This long-term growth is driven by the overall expansion of the economy, technological advancements and increasing productivity. For example, despite short-term declines and periods of market volatility, the S&P 500 has averaged an annual return of approximately 10% since its establishment.
This upward trend means that, while short-term losses are possible, staying invested over the long haul has historically resulted in positive returns. When you keep your investments in place, you allow them to benefit from the cumulative growth of the market, which can lead to significant wealth accumulation over time.
Markets Historically Have Recovered from Crashes
Market downturns, though nerve-wracking, are not uncommon. Whether triggered by economic recessions, geopolitical events or global pandemics, these declines have been a natural part of the market cycle. However, history shows that markets normally recover from these downturns, often rebounding to reach new highs.
Take the financial crisis of 2008, for example. The market experienced a sharp decline, with the S&P 500 losing more than 50% of its value. However, by 2013, the market had not only recovered but had reached record highs. Similarly, the market rapidly bounced back from the significant drops caused by the COVID-19 pandemic in 2020. These recoveries demonstrate the resilience of the market and the importance of staying the course during challenging times.
Handling Market Volatility
Handling market volatility is as much about mindset as it is about strategy. To effectively manage volatility, you should maintain a disciplined approach.
1. Diversification:
Allocating your investments across various asset classes (such as stocks, bonds, and real estate) can reduce the impact of any single investment's poor performance on an overall portfolio.
2. Regular Portfolio Reviews:
Periodically reviewing and rebalancing portfolios can help ensure that it remains aligned with long-term goals and risk tolerance. This doesn’t mean reacting to every market movement but making informed adjustments when necessary.
3. Focus on Long-Term Goals:
Remind yourself of your long-term financial objectives, whether it’s retirement, buying a home or funding education. These goals usually span far beyond the temporary fluctuations of the market.
4. Stay Informed but Don’t Panic:
While it's important to stay informed about market conditions, it’s equally important not to react impulsively to short-term news. Emotional decisions can lead to buying high and selling low, the opposite of a sound investment strategy.
If market volatility makes you uneasy, consider speaking with a Wealth Management by CommunityAmerica Wealth Advisor. We can provide personalized guidance, helping you stay focused on your long-term goals and keep you moving forward on your path to financial peace of mind.
