Markets have been selling off sharply this week, primarily over concerns related to the coronavirus. On news of the virus spreading overseas to other countries like Italy and South Korea, the S&P dropped more than 3.3% (the biggest daily decline since 2018) and the DOW plunged more than 1,000 points. So, what’s the best thing for investors to do when the market starts to tumble?
There’s no doubt that it can be scary when the market takes a nosedive like it did today – but the cardinal rule of investing is to stay the course, and not let emotions dictate your decision making. But it’s hard! Seeing red on the ticker every day is no fun for anyone. So how should you react when the markets are uncertain and volatile?
In this article, we’ll unpack a few basic investing principles that are important to keep in mind when market volatility arises. As you monitor your portfolio during volatile times, make sure to keep these factors in mind.
Market Volatility is Normal and it is Important Not to Overreact.
With today’s action, it may feel like the market is in for a bumpy ride, but when you look at markets historically, many down days haven’t been as extreme in the long-run as it may have felt.
Usually, when the U.S. stock market declines, corrections mean an average drop of 13% and bears mean an average drop of 30.4%. Volatility may feel concerning when you’re in the midst of it, but taking risk and avoiding knee-jerk reactions to downturns is also what drives wealth creation for stockowners.
During volatile market times, it’s crucial to maintain patience and discipline. If you’re an investor, you’re also a human – meaning that it’s not so easy to kick back and stay calm during downward volatility. Nobody likes to see the value of their portfolio decline. So if you have a financial advisor, the most important thing he or she can do for you when the market takes an unsettling turn is help you avoid making rash portfolio changes – and stay the balanced long-term course.
A Diversified Portfolio is the Best Way to Position for Whatever Comes Next.
Regardless of market conditions, diversification is key. It’s one of the best ways your portfolio can cushion itself against bumpiness in the markets.
When market conditions are volatile, it’s a good time to assess how well-diversified your portfolio is and make any changes needed. Here are some resources on diversification:
- A Beginner’s Guide to Portfolio Diversification
- Asset Allocation: Getting Ahead of the Curve
- Benefits of Portfolio Diversification
- Sign up for Personal Capital and schedule a free consultation with a financial advisor
When markets are good, confident predictions can lead to mistakes that can derail your portfolio. You can’t control the markets, but you can take ownership of your investment strategy and asset allocation.
When stocks decline, your portfolio declines too. That’s why you diversify – to cushion against a decline like what we’ve seen in markets this week. If you’re invested in U.S. stocks, you’ve seen that the few hot stocks that were supporting the market have started to fall out of favor. On a relative basis, that bodes well for a more diversified sector and style approach.
We all know that markets go both up and down. Over the 11-year bull market, U.S. stocks trounced all other major asset classes. As we’re starting to see, that won’t last forever, and those that stay diversified and rebalance periodically will reap the benefits.
Don’t Let Emotion Get the Best of You.
It’s normal for investors to be nervous during volatile markets. We encourage investors not to succumb to the stress of a volatile market by bailing out or chasing the latest asset class du jour.
As a rule of thumb, focus on a global, multi-asset class portfolio strategy to deliver superior risk-adjusted returns over time. And when the markets take a dip, remember the importance of a long-term plan for your personal situation that will ultimately provide the best chance to get the financial returns you need.