Recent Market Volatility Offers Valuable Lessons for Investors
The stock market can be a fickle friend. Periods of steady ascent can make it feel as if you’re on a one-way track, only to be rudely reminded when you reach the peak that this is a roller coaster, not a ski lift.
Stock market volatility is not to be feared. Rather, it should be befriended, even utilized for greater future gains. It’s also a great teacher for investors of all experience levels.
Here are six important lessons investors can take from the recent stock market volatility.
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1. Diversification matters most when uncertainty rises.
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This year has been a perfect example of why diversification in your portfolio is so important.
“From the sharp rebound in international equities to changing leadership across U.S. sectors, investors concentrated in a single theme or region may have been caught off guard,” says Crit Thomas, global market strategist at Touchstone Investments.
If you were able to maintain broad exposure to a variety of asset types and classes, you’d have experienced a much smoother ride, and might even have captured unexpected upside.
“It’s not just about protection – it’s about positioning for a wider range of outcomes,” Thomas says.
2. Don’t let politics guide your investments.
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“Investing based on political beliefs can lead to costly decisions,” says Steve Kutz, Northeast U.S. regional president at BNY Wealth. “Markets have shown resilience and growth under both Republican and Democratic administrations, and historically, periods of divided government have been more favorable for equities.”
If returns are your primary objective, put your political views aside before logging into your investment accounts.
3. Market corrections are normal.
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This is a lesson investors are destined to learn again and again, as stock market corrections are a recurring event.
The S&P 500 has experienced three drawdowns of from 5% to 10% per year on average since 1928 and averages one 10% correction per year.
There have been 19 market crashes, defined as drops of 20% or more since 1871, with drops as steep as 79% — and the stock market recovered from every one.
“Volatility is a feature, not a flaw, of equity markets,” Kutz says. “Corrections often present opportunities, and historically, some of the strongest returns come after periods of steep declines.”
The moral of the story is to stay invested during the worst of times and perhaps invest even more. You’ll likely be rewarded on the other side.
4. Befriend down markets.
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Volatility doesn’t have to be your mortal enemy; there is often opportunity lurking beneath the choppy surface.
“When volatility happens, this is a great opportunity to rebalance in a tax-efficient way,” says Erin Wood, senior vice president of Advanced Planning at AssetMark. You use losses to offset gains elsewhere in a strategy called tax-loss harvesting.
“This allows you to get rebalanced to your desired allocation while also staying aware of possible tax implications,” Wood says.
You might also be able to find investments you’ve been coveting on sale during downturns. If you’re leery of throwing money after a sinking ship, consider dollar-cost averaging to reduce risk by wading in slowly.
5. Focus on time in the markets rather than trying to time them.
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Trying to avoid market declines by timing the market is often a losing strategy because “market volatility is often clustered,” says Kezia Samuel, chief market strategist at AssetMark. “Big moves in the market, both up and down, occur within days of each other, making it difficult to avoid only the bad.”
Even professional investors struggle to get the timing right, especially since you have to be right twice to profit: You have to know when to exit before the fall, and when to buy back in before the market rises without you.
A better strategy is to stay the course through thick and thin. “(It) may require extra Pepto Bismol, but in the end, it may be healthier for your portfolio,” Samuel says.
6. Don’t underestimate the resilience of the U.S. economy.
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Perhaps one of the best lessons to take from recent events is the resilience of the U.S. economy.
“Despite repeated warnings of recession and persistently high interest rates, the U.S. economy has again defied the skeptics,” Thomas says. Consumer spending, employment and corporate profits have all remained positive.
“For investors, the lesson is simple: Headline fears often underestimate the adaptive capacity of the U.S. economy,” Thomas says. “Staying anchored in fundamentals and resisting the urge to overreact pays off over time.”
In times of uncertainty and volatility, remember that you, too, are resilient. Your portfolio can recover if you give it enough time.
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