Building Resilience: Investment Strategies to Weather Market Fluctuations
Today’s investors have access to investment strategies that can help them navigate market fluctuations and build wealth. This blog article will help you make smarter choices, increasing your chances of success in a complex and turbulent market.
Understand Market Volatility
According to Dimensional Fund Advisors, since 1926, the US stock market has rewarded investors with an annualized return of about 10%. However, the returns for individual years can vary significantly, ranging from very high to exceptionally low, or somewhere in the middle.
The graph below illustrates annual returns for the S&P 500 between 1926 - 2022.
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You’ll notice the wide range of returns in any given year. During this time period, only 6 years had a return near the average of 10%. The takeaway? Today’s investors should expect and plan for volatility in the market. When you understand that market volatility is inevitable, it becomes easier to keep a more rational perspective during turbulent times.
Maintain Emotional Discipline
Despite considering ourselves rational beings, our investment decisions are often driven by emotions. Although the S&P 500 index achieved an average annual return of 6.06% over the 20-year period ending on 12/31/2019, the typical stock investor only managed to earn 4.25%.
Poor investor behavior and a lack of discipline explains the disparity. We can easily fall victim to our emotions, making poor decisions in the short-term. Implementing strategies, backed by evidence, can help you be a resilient investor during market fluctuations.
Diversify Your Portfolio
Nobel laureate Merton Miller's famous quote, "Diversification is your buddy," reminds us of the importance of spreading investment risk across various asset classes and geographies, rather than concentrating it in one area. This strategy, often likened to not putting all your eggs in one basket, smoothens volatility.
A specific example is how diversification can reduce the fluctuations of returns caused by the performance of a single company.
Today, investors can own a globally diversified portfolio of mutual funds or ETFs at a low cost. When confronted with alarming news headlines, investors can find solace in the idea that 'diversification' is indeed their ally, and that their portfolio is designed to weather the storm.
Don't Try To Time the Market
While it's impossible to predict the exact movements of the market, you can prepare for its ups and downs. When the market takes a nosedive, some investors let their emotions get the best of them, leading to hasty short-term decisions. The allure of market timing becomes strong, as you feel the need to sell or go all-in on cash to stop your losses.
The catch, however, is that there's no reliable method for knowing precisely when to jump back in or rejoin the market. This approach carries the significant risk of missing out on the rapid and robust rebounds that often accompany market recoveries.
For example, investors who bailed out of the market when the market hit bottom during the COVID-19 crisis, missed the quick recovery that occurred shortly after.
The consequences of poor market timing can't be emphasized enough, potentially determining whether you retire on your terms or find yourself working longer than expected.
Rather than attempting to time when to enter or exit the market, shift your focus towards being a disciplined, long-term investor, who stays invested. Remind yourself that maintaining a long-term perspective and recognizing the natural uncertainty of the market, will help you stay committed and stick with your plan. Ride out these inevitable market ups and downs and you’ll be handsomely rewarded in the long-term.
Consider Working with a Financial Advisor
Consider consulting with a financial advisor who can provide personalized guidance based on your individual circumstances.
At Sensible, our portfolio design is crafted to promote positive investor behavior. We streamline your investments, offer global diversification, and focus on keeping costs low. We cut out the complex, simplifying investing to help you maintain emotional discipline and make smarter choices during market fluctuations.
This blog article is for informational and educational purposes only.
Sources:
Dalbar, Inc. "2020 QAIB Report"
Vanguard Investment Research Center
