personal finance | january 5, 2021
What You Can Do When Markets Are Being Volatile
We believe a sound approach is to shift focus away from short-term trends and focus on a long-term strategy.
It’s important to keep short-term market volatility in perspective when compared with long-term market results.
Establishing the proper asset allocation and diversifying your investments can help mitigate the impact of volatility on your portfolio.
Consider reducing the number of decisions you have to make by automating your investments.
Judith Ward, CFP®
Senior Financial Planner
1. Focus on the long term.
First, understand that whatever is happening in the headlines may not be happening in your account—especially if you have a mix of stocks and bonds. Next, consider how time smooths out market fluctuations, which can help you put any concerns into context. For instance, the S&P 500 Index has experienced double-digit annual losses in 11 of the last 94 years (through 2020). And while one-year returns may fluctuate dramatically, keep in mind that over any rolling five-year period during that time, the S&P 500 only has experienced double-digit losses twice—both times happened more than seven decades ago as results of the Great Depression.
And stocks have never lost ground, double digit or otherwise, in any rolling 15 calendar year period since 1926. Therefore, for a long-term goal, you can feel more confident holding on to stocks, even if you experience short-term declines. Past performance cannot guarantee future results. It is not possible to invest directly in an index.
2. Find a balance in your allocation.
An appropriate mix of stocks and bonds can help temper the effects of volatility on a portfolio. The precise definition of “appropriate” will depend on your time horizon and risk tolerance, and that definition will change as you get closer to your goal. You also should consider diversifying your stock and bond holdings. Diversification—investing in hundreds or potentially thousands of companies as you do when you invest in a mutual fund—helps reduce volatility by limiting the negative impact of any single investment. It also gives you access to many different types of companies around the globe. Of course, diversification cannot assure a profit or protect against loss in a declining market, but it can help smooth out a portfolio’s ups and downs.
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3. Consider automating your investment strategy.
To avoid being overly influenced by emotion, try reducing the number of decisions you make. Consider automating your contribution amounts, the timing of your contributions, and even the increases in your contributions. In short, when managing your investments, look beyond the volatility of the moment and focus instead on adhering to your long-term strategy. Continue to save and invest, and maintain an investment mix that is appropriate for your goals and time horizon—not market conditions. These are the variables you can control—and they are the most likely to determine whether you succeed at reaching your investment goals.
This material has been prepared by T. Rowe Price for general and educational purposes only. This material does not provide fiduciary recommendations concerning investments, nor is it intended to serve as the primary basis for investment decision-making. T. Rowe Price, its affiliates, and its associates do not provide legal or tax advice. Any tax-related discussion contained in this material, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or professional tax advisor regarding any legal or tax issues raised in this material.
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