Staying on the Ride: Investing Through Market Volatility
Updated: Oct 25
Financial personality Dave Ramsey often compares investing in the stock market to riding a roller coaster. There will be ups, downs, and sometimes frightening drops. But his message is simple: the people who get hurt are often the ones who try to jump off before the ride is over.
It's an interesting way to think about investing, particularly during periods of market volatility.
When markets are rising, staying invested can feel relatively easy. It's when markets begin falling, headlines become alarming, and account values decline that investors face one of their greatest challenges: resisting the temptation to react emotionally.
A Lesson From 2020
The COVID-19 pandemic provides a powerful example of just how quickly markets can change direction.
As the pandemic spread in early 2020, uncertainty gripped financial markets. Businesses closed, unemployment surged, and investors struggled to assess the potential economic consequences.
Between February 19 and March 23, 2020, the S&P 500 Index fell approximately 34%, according to S&P Dow Jones Indices. For investors watching their portfolios decline almost daily, it was understandably unsettling. Yet what happened next was remarkable.
By August 18, 2020, less than five months after reaching its March low, the S&P 500 had recovered its losses and closed at a new record high. By the end of 2020, the index had delivered a positive total return of approximately 18.4% for the calendar year.
Consider an investor who became frightened in March and decided to sell their investments to avoid further losses. That investor would then have faced another difficult decision: when to get back into the market.
And therein lies one of the biggest challenges of market timing.
The Problem with Trying to Time the Market
Successfully timing the market requires making two decisions correctly: when to sell and when to buy back in. Selling during a market downturn may provide temporary emotional relief but deciding when it's safe to reinvest can prove equally challenging.
Markets don't necessarily recover when the economic news improves. In fact, stock prices often begin recovering while economic conditions remain difficult, reflecting investors' expectations about the future rather than just current circumstances.
An investor waiting for reassuring headlines may therefore find that a substantial portion of the recovery has already occurred.
The experience of 2020 illustrates this perfectly. The market recovered its previous high even as the pandemic continued to disrupt everyday life and economic activity.
This is why investors often hear the expression "time in the market, rather than timing the market."
The principle isn't that markets always rise or that every investment will recover. Rather, for investors with an appropriate long-term strategy, remaining invested through periods of uncertainty can help avoid the risk of missing an eventual recovery.
Staying Invested Doesn't Mean Doing Nothing
It's important to distinguish between reacting emotionally to market movements and making thoughtful changes to an investment portfolio. There are legitimate reasons to adjust investments. Financial circumstances change, retirement approaches, and investment objectives evolve.
A portfolio may also need periodic rebalancing to maintain its intended allocation between equities, fixed income, and other investments. The key is that these decisions should be driven by an investor's financial circumstances, objectives, and risk tolerance rather than short-term market headlines.
Keeping Perspective
Market volatility is an unavoidable part of investing. Although historical market performance has generally rewarded patient, diversified, long-term investors, there are no guarantees about how quickly markets will recover or what future returns will look like.
The goal isn't to predict every market movement. It's to have an investment strategy designed around your individual circumstances and the discipline to evaluate it thoughtfully when markets become unsettled.
Returning to the roller-coaster analogy, staying on the ride is much easier when you are confident that you chose the right ride in the first place. And that raises an equally important question: How do you build a portfolio that you can remain comfortable holding when markets become volatile?
We'll explore that in the companion article, The Right Portfolio Is One You Can Stay Invested In.
Disclaimer: This article is intended for general educational and informational purposes only and does not constitute individualized investment, legal, or tax advice. Individual circumstances vary, and investors should consult appropriately qualified professionals before making financial decisions. We do not give legal or tax advice. Always consult a tax or legal adviser to review your individual situation. The information contained in this article reflects the opinions of the author and not necessarily those of Portfolio Resources Group, Inc. or its affiliates.
Rachel Weiss is a licensed investment professional in both the United States and Israel, with over 17 years of experience in the financial services industry. She works with clients to establish and manage U.S. investment accounts, helping them build investment portfolios aligned with their individual financial goals, circumstances, and risk tolerance.
Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI.
For more information, visit www.weissinvest.com or email rweiss@prginc.net.
Sources and Further Reading
S&P Dow Jones Indices, SPIVA U.S. Year-End 2020, published March 11, 2021- Click here to view article.
S&P Global, Daily Update: August 20, 2020 - Click here to view article.
