Market Volatility Got You Spooked? Don’t Hit the Panic Button
BECU Investment Services
Presented by Ric Sarro, CFP® and Senior Program Manager
The return of volatility to the stock markets in 2018 made me think of those famous words by President Franklin Delano Roosevelt in his 1932 inaugural address: “The only thing we have to fear is fear itself.” The U.S. was just emerging from the Stock Market Crash of 1929 and a severe depression. Mr. Roosevelt went on to refer to that fear as: “nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.”
I'm neither old enough to remember the Great Depression, nor did I hear that speech firsthand. However, during my career in the financial services industry, I have experienced the crash of '87, the tech bubble burst, and the Great Recession in ‘08.
Let's put today's market volatility in perspective: We just experienced one of the longest periods of low market volatility in history. This period of relative quiet plus steady gains lulled many into a likely overly optimistic expectation of market performance.
Consider the reaction, this year, to the first big drop that occurred on February 5. Headlines included: “Dow Plunges 1,175 -- Worst Point Decline in History” (Source: CNN MoneyOpens a new window) and “Why the Stock Market is Crashing Now”. (Source: TimeOpens a new window)
Also consider the following points:
- The February 5 decline was just 4.6%. It did not even register in the top 100 of single-day losses. (Source: Morningstar)
- That decline was far short of even being a correction, commonly defined as a 10% pullback.
- History shows that in normal times, there has been an average of three 5% declines per year, one 10% correction annually, and a 20% drop once every 3.5 years. (Source: American FundsOpens a new window)
The current volatility is not so much the new normal. Rather, it is a return to the old normal! It just seems worse, coming on the heels of a historically abnormal period.
What can you do?
Tune out the radio, TV and blogs. Take a deep breath and review your investment plan and your financial goals. Before making any moves, ask yourself the following:
- What is my time horizon (when will I need the funds)?
- Is my portfolio properly structured to help me manage the impact of these swings?
- Do I have the cash resources to avoid taking funds out of my long-term investments at the wrong time?
Review your plan
The longer your time horizon, the more likely the impact of a single pullback, correction, or even a bear market will be muted. Did you know that the average “bear” market lasts less than 1 year (11 months)? And that the average “bull” market lasts more than 2 years (28 months)? Further, sharp corrections or bear markets are frequently followed by substantial rallies or bull markets. (Source: Franklin TempletonOpens a new window)
During the Crash of '87, for instance, a large number of investors retreated to the sidelines during a 3-month, 36% loss—only to see the market rally 72.5% over the next 3 years (Source: Franklin TempletonOpens a new window). Those that moved to the sidelines missed much of that rebound, while those that stayed the course should have been rewarded for their patience and resolve. More recently, the Great Recession (2007-2009) is burned into most investors' memories, featuring a loss of nearly 50%. An investor with a portfolio roughly reflective of the S&P-500 could have seen their investments almost quadruple since then if they stayed invested when the index hit its low in March 2009 (Source: Bloomberg, 3/6/ 2009 to 10/20/17). So, while past performance is never a guarantee of future performance, there may be some truth to the old saying that “time heals all wounds.” Certainly you should take time to review your plan for some course corrections during these market swings. Just make sure that any decisions are measured in reason, based more on your long-term outlook and are not simply reactions to fear itself.
If your portfolio is properly balanced, losses in the portfolio from declines may be lessened. Balancing with a broad mix of investments based on both your comfort level with risk and your time horizon can help weather the storm.
A key part of building your portfolio is understanding two key factors: how much risk you are willing to take and when you need to get to your financial destination. Too many investors get caught up in the headlines and make decisions that detour them from their ultimate financial goals. Tune out the chatter and trust in your planning!
Emergency savings fund
It's critical that you have sufficient savings and emergency funds. This allows the ability to sidestep market declines should you need cash. At a minimum, you should have 3 - 6 months of living expenses set aside in a liquid account. That way, you won't be tempted to take funds from your investment account at exactly the wrong moment. If you don't yet have 3- 6 months of savings built up, set up a systematic savings plan to “pay yourself first” and build up that protection (Hint: It'll only cost you a few latte's per week to get started.). Once you reach your cash goal, if appropriate, you should consider keeping that systematic payment going and spill the excess contributions over into your investment account.
When disaster strikes
Finally, most companies—and hopefully most individuals—take the time for disaster planning in the event of a fire, earthquake or other calamity. Your financial plan should be no different. You should have the same preparation for what happens during emotional market swings. When things aren't emotional, ask yourself what action(s) you'll take if and when volatility hits. For one or more of these considerations, you may benefit from working with a professional who can guide you during stressful times and help you refocus your long-term vision.
Financial advisors* with BECU Investment Services are ready to talk to you. Click here to set up a complimentary consultation or call 206-439-5720.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors. The Standard & Poor's 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
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