Volatility is normal (and good in the long-term)
The recent volatile markets have certainly caused many to worry and begin to second guess their investment choices and risk tolerances. This is a perfectly normal reaction to the first noticeable market drop since March 2020. The 5-10% declines in various indexes are perfectly normal for markets that have experience outpaced growth over the last several years. Unfortunately, there is only so long that this can last. There is little need to fear. This is simply the markets way to say, “whoa we need to slow down a bit and are these prices correct?”
In difficult times markets have proven resilient often bouncing back within weeks. A long-term perspective is key. Keep in mind that the S&P 500 is only 5% down from its recent record highs. To keep it in an even longer perspective the S&P 500 has only had 7 down years out of the last 42! So, remember that even if you invest in one of the down years, you only need to take the time and patience to wait another year or two before growth resumes. Any stock market investments should always be for longer term goals such as college savings, retirement, or large purchases a minimum of 5-10 years from now. The markets are not the place for short-term bets to make fast money or to invest the funds you may need to access within the next few years. Your longer-term investments will be just fine as has been historically show time and time again. It is truly the case of slow and steady wins the race. Don’t ask yourself how the markets have performed over the last few months or year, show yourself how much they have returned in the last 10-20 years for those who are disciplined enough to let it work for them.
Try your best to ignore the day-to-day swings in your investments as that will only serve to drive you crazy. We expect to see quite a bit of volatility in the next year or so and yes, this could get worse before it gets better. Short-term downturns have little to do with the long-term growth potential of our economy and the stock markets. We have gotten used to 15-20% market returns in the last few years which is growing too fast and is unsustainable. This year and the next few years will likely return to boring average growth of 4-6% annually. Markets behave like this simply because there is uncertainty with inflation, interest rates and the ongoing pandemic supply chain issues. Remember stock market investments represent funds that you will not need for several years, and patience will reward us with needed growth. We do not think this crazy up and down will last long and even with a 10% drop we are still likely to still end the year in the positive. Patience and time always pay off and it really is only a loss if you must sell and withdraw assets too soon.
What investors should keep sight of is that, over time, these inevitable low valleys have given way to higher peaks. It's why we continue to invest to finance our long-term goals, such as retirement. And it should be our goals that govern our approach to investing. These goals should be built on realistic assumptions for investing returns. This is a time to embrace balance and discipline for the long-term goals you wish to achieve.
Policymakers face a balancing act in the months ahead, one that could carry significant implications for economic growth, inflation, and investment returns. Their jobs won't be easy. Investors, meanwhile, may find their discipline challenged by markets that have approached or already entered corrections, or falls of 10% or more from recent highs.
Our message for investors, as always: Maintain perspective, tune out the day-to-day noise that can lead to impulsive decisions, be true to your goals, and put your faith in a history that has rewarded those who embrace the long term. - Peter Bobolia, CFP, ChFC
Photo by Behnam Norouzi on Unsplash