When Market Conditions Become Volatile, How Will You React?

in Market Commentary by

As investors across the globe have seen, this week has been a volatile one in the downturned capital markets.

When markets move drastically, it’s important to remember a few basic investing principles. As you monitor your portfolio during volatile times, make sure to keep these important factors in mind:

Market Volatility Is Normal And It Is Important Not To Overreact.

It may feel like the market has had some especially big swings this year, but when you look at markets historically it hasn’t been as extreme as it may have felt.

So far, 2015 has been one of the flatter years on record, with the global stock market down 2.5% year to date. Usually, the US stock market declines in 1/3 of years. When US stock markets decline, the average drop is 14%. Volatility may feel concerning when you’re in the midst of it, but taking risk is also what drives wealth creation for stockowners.

At Personal Capital, we always stress how crucial patience and discipline are during volatile market times. 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 they can do for you in times like this is to 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. When market conditions are volatile, it’s a great time to assess how well diversified your portfolio is, and make any changes needed.

When markets are good, confident predictions 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 the blow of a decline like what we’ve seen in markets this week. If you’re invested in US 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. This approach has held up well over the course of the month, compared to capitalization weighted indexes.

We all know that markets go both up and down, and when they go up we’ll likely see substantial upside potential in a few battered and unloved sectors, like Emerging Markets Stocks and Bonds. Over the last several years (and especially the last 12 months) US Stocks have trounced all other major asset classes. That won’t last forever, and folks that stay diversified and rebalance periodically will reap the benefits.

Don’t Let Emotion Get The Best Of You.

Many experts suspect that signs of greater than expected weakness in China caused the recent market decline. While this could slow global growth, we aren’t predicting an imminent bear market (while that could still happen).

Troubles in China may get nasty, but we’re not worried about a 2008 Lehman type scenario for stocks. The sharp market plunge in 2008 resulted from a massive liquidity freeze where banks lost confidence in each other. In today’s case, western banks have very little exposure to China. Oil, commodities and emerging markets currencies are at risk, but they have already been hit hard and can only fall so far.

It’s normal for investors to be nervous during volatile markets, especially given how long it’s been since we’ve experienced a meaningful decline. We encourage investors not to succumb to the stress of a volatile market by bailing out or chasing the latest asset class that is doing well. If you do, you’ll likely be worse off.

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 that will ultimately provide the financial returns you need.

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Craig Birk, CFP®

Craig Birk, CFP®

Craig Birk leads the Personal Capital Advisors Investment Committee and serves as the Chief Investment Officer. His focus is translating improvements in technology into better financial lives. Craig has been widely quoted in the Wall Street Journal, Bloomberg, CNN Money, the Washington Post and elsewhere. Prior to Personal Capital Advisors, he was a leader within the portfolio management team at Fisher Investments, helping assets under management grow from $1.5 billion to over $40 billion. Craig graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.


  1. Marshall okun

    Totally agree! You’re spot on. Stay the course and be patient is the name of the game.

  2. Michael DaughertY

    I like your blog here good information well written one thing I would like to share with your readers in regards to a 401(k) investor I take advantage of these downturns as my paycheck contributions to my 401K go into a fixed income fund when I see the markets drop down and bottomed out I transfer those funds to my diversified positions within my 401(k) portfolio.

    • Rusty

      So how do you know when it has “bottomed out”?

  3. Dave

    No way. Any smart investor would get out now. Move money to guaranteed income or cash and wait for the crash to take full hold. Watch the levels on the way down, the key being the 200 day moving average. Stay in and watch your money vanish.

  4. Steve

    Agreed on all accounts, the worst time to sell your stocks is when markets are down. On the contrary, I like to buy stocks when those stocks are on sale, as they have been over the past couple of days.

    The truth is markets will always fluctuate – they always have and always will. It is what keeps them in balance. Just like when you have a string of really awesome days, you might have a stretch of downright crappy days. Balance tends to be the natural order of things.

    Granted, it’s never nice to watch your money supposedly “disappear” out of thin air, but remember that you haven’t lost anything if you don’t sell. Keep your head in the game and your money active in the market, because as history shows, you always always make money in the long run.

  5. Carol

    I am pretty rattled by this downturn. I am not young and have 10-12 years until retirement. I just started investing the last 2 years. I had about 90% in cash when I started. I have abut 25% in cash now.

    With this last sell off, I am in the red now in my Vanguard account. My boyfriend is urging me to sell everything. He says that a 20-40% drop may be coming.

    So what should I do?

  6. Financial Samurai

    I’ve definitely devised a game plan to leg in beyond my normal dollar cost averaging. Things feel chaotic now, but if you have an investing play book to account for various scenarios, investing becomes much easier.

    But hopefully people are buying real, tangible assets once in a while, so they at least have something to hold onto just in case the stock market goes to the toilet!


  7. Clay

    As a fairly recent retiree, this most recent plunge (along with the downturn last week) has hit my retirement funds a little more than I’m comfortable with. No longer employed, there are no inputs to 401(k) or 403(b) plans for me. On the other hand, I learned somehow not to panic, cash out, and sit on the sidelines. I just hope my diversification planning pays off with smaller losses than might otherwise be the case.

  8. shar y

    I would like to know if you would offer the same advice to someone who is 3-4 years from retirement? Still stay the course?


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