Stay the Course Amid Market Volatility

The Standard & Poor’s 500 is an index that best gauges large capitalization U.S. equities that are publicly traded. The S&P 500 Index is capitalization weighted. This means companies are represented more heavily in the index where components with higher market caps carry a greater percentage weight in the index (more shares on the market with a higher price lead to a higher representation in this index). The S&P has an annualized rate of return since its inception in 1957 to the end of 2021 of 11.88%.  Year-to-date 2022 (as of Sept. 19) the return for the S&P is a negative 17.8%. As a result of business cycles and market cycles, stock market crashes are an inherent risk of investing.

It is easy to invest when a mutual fund or stock is going up; it feels good to see your investment account grow. The opposite is true in times like these. As workers put money monthly into their 401k accounts and yet still watch the market value drop each month, it’s a tough pill to swallow. Feelings are deceiving as the best time to put money into a 401k is when share prices are lower. Good quality stocks, ETFs and mutual funds are on sale.

In a study done in 2016 by Chang Yann Jie and Leow Chee Seng and published in the International Journal of Economics, Commerce and Management, “investors tend to buy high and sell low due to the desire to jump into a hot investment and to sell lower to avoid further losses.” The most important part of investing in equities is staying the course. In the same study, “people tend to avoid losses more than to acquire gains. In a 1992 study by Kahneman, “losses are twice as powerful, psychologically, as gains.”

Investing is a trade-off of risk and return. To obtain the returns to beat inflation and retire, taking on risk is necessary. With inflation at a multi-decade high, it is important to get annualized returns over the long term that beat the inflation rate so you can retain buying power.

What about timing the market? The difficult part of timing the market is that stocks are a leading indicator.  What that means is it will go down before the economy shows signs of slowing and will rebound during a recession before the economy recovers. People who try to time the market with short-term moves tend to sell when stocks have already gone lower than buy in after the largest recovery gains have been made. Therefore, to garner the most from equities and portfolios in general, it pays to stay the course.

How to stay the course? First, understand the volatility of your portfolio when you first invest and then check in at least annually. Your risk tolerance will change as you age and your portfolio allocation will shift with bull and bear markets. Second, when the markets are high or low, try to take a longer view. According to Four Pillar Freedom, the S&P 500 has never experienced losses during any 20-year period since 1928. For 10-year periods, the median annual return is 6.5%, the minimum annual return is -3.8% and the maximum annual return has been 17.9%. In today’s media frenzy, ‘plunges’ in the markets and negative news sell, so try to put things in perspective when you hear a news story.  Instead of simply reporting facts, journalists need eyes and negative news catches attention. Using words that mislead, like ‘plunge’ when the market is down 1% is par for the course. Take news with a grain of salt. 

Extra help in staying the course can also come from an advisor. When someone has been in the industry, studied financial assets and has seen bull and bear markets, it is easier to see the potential upside and help not make investment decisions based on market fear or greed. In a study by Vanguard, advisors helped investors remain invested and improved the long-term returns by doing so.  

In closing, bear markets, corrections and recessions are never fun but are part of the natural ups and downs of investing and the economy.  Knowing these are inevitable while also knowing the upside always comes is at the heart of being successful in investing.

All investing is subject to risk, including possible loss of the money you invest. Nothing in this article should be construed as investment or retirement advice.  Always consult with a professional advisor and consider your risk tolerance and time to invest when making investment decisions. Review your personal situation with a professional before planning any gifting or estate planning.

Judy Loy is a Registered Investment Advisor, ChFC®, RICP® and CEO of Nestlerode & Loy, Inc. in State College.