Are Volatile Stock Markets Good for Investors?

Derek Bostian, CFP® Derek Bostian, CFP®

When the ups and downs of stock markets leave you stressed and wondering whether stocks really will help you pursue your long-term financial goals, there are two things to remember:

  1. Historically, over long periods, stocks have tended to move higher.
  • For instance, at the start of October 1987, the Standard & Poor’s (S&P) 500 Index was valued at 327. On Black Monday, October 19, the Index lost 22 percent in a single day. By the end of the month, it was trading at 247. Many investors wondered if their savings and investments would ever recover.1, 2

By October 31, 2018, the S&P 500 was trading at 2,740.3

  • In March 2000, the dot.com bubble burst. On March 10, the NASDAQ Composite closed at 5,049 and less than a month later, on April 5, the Index was trading at 4,169 – a loss of about 17 percent. Many investors wondered if their savings and investments would recover.4, 5

By October 31, 2018, the Nasdaq Composite was trading at 7,304.6

  • In 2008, when the financial crisis roiled stock markets, the Dow Jones Industrial Average opened the year at 13,044. It finished the year at 8,776 – a 33 percent loss. Many investors wondered if their savings and investments would ever recover.7

On October 31, 2018, the Dow was trading at 25,381.8

The point of this brief history of stock market downturns is U.S. stock markets are volatile. They suffer losses and experience gains. However, over time, indices have trended higher.

For investors with long-term financial goals, that can be good news. Those who can tolerate volatility may find including stocks in well-allocated and diversified portfolios help enhance returns over time. Keep in mind, of course, that past performance is no guarantee of future results.

  1. Market volatility may create opportunities.

When a portfolio loses value in uncertain markets, it’s natural to wonder whether you should sell. Sometimes, investors do so without considering how the decision will affect their long-term goals. While selling isn’t always a mistake – perhaps, your asset allocation is out of balance or you want to harvest tax losses – selling without a strategy may be erroneous.

Here are a few tips from Fidelityand CNBCthat can help investors avoid mistakes and make the most of opportunities during periods of market volatility:

  • Keep perspective.  As the examples above demonstrate, stock market downturns are normal. Historically, markets have recovered and delivered positive returns over the longer term.9. 
  • Stay the course.  If you work with our firm, you know our philosophy on having a portion of your income and portfolio principally protected.  This helps to prevent having to sell low when our clients need cash 0r income.  
  • Buy low.  If you’re contributing to accounts to save for the future, it may be a good opportunity to buy low.  While the markets could go lower, if you’re looking 10+ years out you may be presented with an opportunity to deliver return to your overall portfolio while getting a bargain on individual stocks or investments.
  • Review your asset allocation.  If you haven’t done it recently, review your asset allocation strategy. Does it still match your target allocation? Sometimes, after periods of strong market performance, a portfolio will need to be rebalanced.
  • Review your risk tolerance.  If market volatility is causing you to lose sleep, it’s possible your risk tolerance has changed or is lower than you anticipated.  When markets are going up, it’s easier to say you can stomach the roller coaster.  But if the last few weeks have caused you stress and anxiety it may be that you’ve overestimated your tolerance and need to revisit it.   If that is the case, reducing overall portfolio risk may be a wise choice. 10
  • Harvest tax losses.  Volatile stock markets can present opportunities for sophisticated tax plannings strategies.  Many advisors would prefer you keep your money in the stock market but when the opportunity to save on future taxes presents itself it may make sense to evaluate the chance.
  • Consider a Roth conversion.  If you’ve been thinking about converting a Traditional IRA into a Roth IRA, completing the move during a market downturn could reduce the amount of taxes owed.10

Whether you’re investing for short- or long-term financial goals, it’s important to recognize the opportunities created by market volatility, and to discuss how you may be able to make the most of them.  Click here to schedule a call with our team.

Sources:

1https://www.investopedia.com/terms/b/blackmonday.asp

2https://finance.yahoo.com/quote/^GSPC/history?period1=557384400&period2=568101600&interval=1d&filter=history&frequency=1d

3https://finance.yahoo.com/quote/^IXIC?p=^IXIC

4http://time.com/3741681/2000-dotcom-stock-bust/

5https://finance.yahoo.com/quote/^IXIC/history?period1=951890400&period2=955774800&interval=1d&filter=history&frequency=1d

6https://finance.yahoo.com/quote/%5EIXIC/history?p=%5EIXIC

7https://finance.yahoo.com/quote/^DJI/history?period1=1167631200&period2=1230789600&interval=1d&filter=history&frequency=1d

8https://finance.yahoo.com/quote/^DJI/history?period1=1509598800&period2=1541134800&interval=1d&filter=history&frequency=1d

9https://www.fidelity.com/viewpoints/investing-ideas/strategies-for-volatile-markets

10https://www.cnbc.com/2018/04/02/how-investors-can-take-advantage-of-market-volatility.html

Derek Bostian, CFP®